Taxes are a complicated affair in the United States, especially if you are running a business of your own. Plenty of new and old establishments get called for an audit, or in worse case scenarios, the IRS may even put a tax levy on their assets. If you are on the verge of launching your new startup, or if you have already launched one and are finding the tax situation to be confusing, read on as we discuss a few of the essential tax return mistakes that startups are often associated with unwittingly. A clearly thought out startup tax strategy for the self-employed is critical.
Sole Proprietorship is a Bad Idea
The first startup tax strategy decision is your legal structure. It doesn’t matter how small the business is, with sole proprietorships or even with General Partnerships, the risk to personal assets for everyone associated is far too great. To avoid personal liability on account of business-related debts to both creditors and the IRS, an LLC or a C-corporation would be the ideal structure. If the business can qualify as an S-Corporation, it’s also a personal liability-free entity.
Neglecting Form 8832 as an LLC
A startup with a single-member LLC structure should never forget to fill form 8832, or else the IRS will gain the authority to treat any future tax debts in the same way that they would treat a sole proprietorship, i.e. they will seize personal assets for tax debt settlement.
It’s true that small businesses fare better under the LLC taxation structure, but in case your startup is funded by multiple investors, having a C-Corporation will be something that they may insist on. Also, submitting Form 8832 is unnecessary for corporations, and there are some other long term advantages to consider as well.
Ignoring IRS Notices
The IRS will not call you. If you get a call like that, rest assured that it’s just a scam call. What the IRS does do is send out physical mail notices to a business or any caretaking party in charge, provided they find a reason to contact them. As a matter of fact, the federal tax department will actually send you more than just one notice before taking any severe action, so read your mail and never ignore an authentic mail notice from the Internal Revenue System.
What Can You Do if the IRS has Already Taken Steps?
If you are already in a precarious situation with the IRS, then the first step to take would be understanding what is a tax Levy and how it is affecting your financial situation, with the help of your tax consultant. Three full weeks or 21 days notice is given when the revenue service seizes a property/bank account, so acting fast is of the utmost importance.
After that period, negotiations may not even be a possibility anymore. in general, though, the internal revenue service is willing to be patient and figure out a payment plan for settling tax debts, if the business reverts back in due time and in proper legal language.
Even if you don’t get everything right the first time, a review and adjustment of your startup tax strategy can help.