Becoming a small business owner is a noble and rewarding pursuit, but it does come with some challenges. Taxes are one of the most difficult things for small business owners to navigate because there is just so much to know. This is why so many business owners turn to tax professionals to handle tax returns for them. However, allowing the wrong “professional” to file your returns can come with dire consequences. Some less credible tax services will inflate your business tax credits in order to get a larger payout.
Fuel Tax Credit Scams
Claiming fraudulent fuel business credits is one of the many ways in which scammers pull off tax credit fraud. The eligibility rules for fuel tax credits are fairly strict and limited to: commercial fishing boats, farms, school bus companies, and businesses that run vehicles on local roads rather than federal highways. The likelihood that your business actually qualifies for any of these credits is fairly low.
Despite the specific requirements for the fuel tax credit, questionable tax prepares still claim tax credits fraudulently on a regular basis. Part of the reason this fraudulent credit is so common is that while you’re required to keep a log of your fuel purchases, you don’t actually have to attach any receipts to your returns. However, if and when the IRS finds out that you have been wrongly claiming tax credits on your returns, they are going to hold you and your business accountable—and not the preparer. As the taxpayer, you are responsible for any and all information that gets reported back to the IRS.
Research Credit Scams
According to the IRS, the research credit is an important feature in the tax code to encourage research and experimentation in the private sector. After all, what would America be without its incredible technological innovations? However, this is not something to be taken advantage of. The credit is only to be used for experimentation using science that is intended to improve a product or process the taxpayer holds for sale or lease.
There should be no uncertainty when including the research tax credit in your returns—so if you’re running an ice cream business and you’re “conducting research” to find a cheaper cone supplier, you might be looking at an audit. Qualified research expenses do not include expenses without a proven nexus between the claimed expenses and the qualified research.
How to Avoid Wrongly Claiming Tax Credits
The simple solution would be to file your own taxes and not lie; however, that’s much easier said than done. Most small business owners are too busy working to find the time to file their own taxes. But remember: this isn’t an excuse to become negligent or complacent; hiring a qualified tax professional could be the difference between life and death for your business.
When using a third party for filing tax returns, make sure to get copies of everything that goes to the IRS. Your tax representative might get annoyed, but it’s better than receiving a letter from the IRS notifying you of penalties or an audit. Go through your returns and look for tax credit claims that shouldn’t be there. If you aren’t careful, you could be asking yourself, “How many years can tax credits be investigated?”
What to do if Your Business Has been Targeted by the IRS for Wrongly Claiming Tax Credits
Even if you were unaware of the fraudulent tax claims, the IRS will still hold you accountable. Your first step is to seek a tax attorney or tax professional who can help you resolve the issue. More than likely, the IRS will issue your small business a penalty for claiming excessive credits. You need someone who can help you put together a case to defend yourself and your business. Gather any and all documentation related to your taxes and the prior tax representative you were working with. Get the tax representative’s ID number, if available, so that you can report them to the proper authorities.
If you or your business is facing penalties for claiming excessive credits on your taxes, don’t hesitate to call Community Tax today. Our qualified professionals are standing by to assist you with all of your tax needs. Don’t let IRS penalties cripple your small business; Community Tax can help.