A tax controversy occurs when an individual taxpayer and an authority assessing taxes disagree about someone’s responsibilities. For example, if the Internal Revenue Service (IRS) accuses someone of tax evasion by misrepresenting their income, that tax controversy might eventually lead to federal prosecution and major tax debts.
People in different circumstances have different levels of risk for legal issues related to income taxes. Self-employed professionals, including small business owners and independent contractors, are at particularly high risk of weathering a tax controversy that can lead to legal or financial challenges for the following reasons.
They may fail to file estimated taxes
Tax filing requirements are actually different for those who work as independent contractors or run a small business when compared with normal employees. The average worker only needs to file a single tax return each year with the IRS. That return helps clarify the deductions and credits that may apply to someone’s income and ensure they have paid everything they should. Self-employed professionals have additional obligations. In most cases, they will need to submit quarterly estimated tax payments to the IRS in addition to an annual tax return. Failing to do so could lead to more scrutiny from the IRS and possibly additional costs.
They may not have the funds to pay what they owe
Someone who has just started a small business or begun working as an independent contractor may not understand how their income tax responsibilities are different. Employers actually contribute toward employment taxes. Without those contributions, individuals have to pay more. People may have failed to retain enough money to make the large tax payments necessary when they file their annual income tax return as a self-employed professional.
They may not use deductions appropriately
There are rules restricting what credits and deductions self-employed professionals can utilize, and people may violate those rules without intending financial misconduct. Little mistakes regarding write-offs and deductions might eventually lead to major tax debts and possibly legal challenges.
Understanding why self-employed professionals are at risk of tax controversies, and seeking legal guidance when necessary, may help them more effectively avoid mistakes that could lead to tax debt or prosecution.