In Michigan, business owners who are trying to stay in operation, meet all their expenses, and turn a profit might make missteps with reporting their taxes. Or there could be allegations that they have not paid their taxes in full and are being confronted by an Internal Revenue Service investigation. When there is an investigation taking place, those alleged to have underreported their income need to understand the law and know how to combat the charges.
This could happen to anyone. Someone who did this knowingly or unknowingly, thought they were using wise tactical strategies to minimize their tax liability and made errors, or people who have a moderate income and are having trouble making ends meet could be confronted with this issue.
From the start, it is essential to understand the charges, know the potential penalties, and take the necessary steps to address the issue with as few long-term consequences as possible.
The IRS treats accuracy-related penalties seriously
Underreporting income falls under the IRS’s rules mandating an accuracy-related penalty. Failing to pay what the income dictates should be paid under the law is illegal. So too is it illegal to take deductions that are not applicable. In some instances, this is done based on negligence or simply ignoring the law. On others, it is a significant understating of how much income tax is owed.
Ignoring the tax laws when completing a tax return could lead to severe ramifications. It can include failing to report income. Perhaps a person owns a construction business in Michigan, a client paid them in cash, and they reported part or none of what they were paid. Taking off too much in deductions for supplies would be another example. If the IRS finds out about this, they will pursue the business owner for what is owed. In egregious circumstances, there could be harsh penalties including large fines and the possibility of jail time.
Understating how much is owed is another form or an accuracy-related failure. It is categorized as “substantial” if it is 10% less than what was supposed to be paid or $5,000, whichever is higher.
Financial penalties will be 20% of the underpayment that was because of disregarding the law or negligence. If it is substantial, the amount is 20% of the amount of the underpayment. The IRS also charges interest.
People accused of underreporting can fight the charges
Simply because a person has been accused of underreporting their income in any way does not mean they are guilty. The penalties can be extensive and that does not even mention the negative perception potential customers might have for a business that was accused of failing to pay its taxes. In extreme cases, there can be jail time. This can damage or outright destroy the person’s business and reputation.
When dealing with the IRS amid accusations of underreporting or other tax law violations, it is important to be protected. Having legal representation from the outset can assess the case, find strategies to fight back, seek solutions, and even prove that the person had paid what they were supposed to under the law. Consulting with professionals experienced in tax law can be helpful.