How To Avoid Small Business Tax Fraud

How To Avoid Small Business Tax Fraud

by Brendon Pack, November 2015

In the past few years, tax fraud has become an incredibly out-of-control problem, affecting millions of both individuals and small business owners, demonstrating how nobody is truly exempt from a potential IRS tax fraud scheme.

What Is Tax Fraud?

Tax fraud comes in all forms, which makes it that much more difficult to combat. Scammers often steal personal information to file fraudulent tax returns on behalf of an innocent taxpayer, and then claim a refund check for themselves. It can take lots of unnecessary time and energy to resolve these issues with the IRS in order to get the refunds to those who deserve them and prevent these tax frauds from occurring in the future.

Tax fraud is considered a criminal activity, and there are numerous penalties for tax fraud that include financial penalties and jail time. If you believe you are a victim and want to report tax fraud, the IRS offers tax fraud reporting assistance through a toll-free phone number.

What You Can Do To Avoid Tax Fraud

The good news is that there are some measures you can take to safeguard your personal information and tax-filing activities. To reduce your chances of becoming a victim of small business tax fraud, consider these actions:

1. File your tax return(s) early.

When filing your personal and business taxes, being an early-bird tax filer can help reduce the chances of a fraudster filing an income tax return in your name. This is because an IRS agent would see that two tax returns were filed using the same identity. If your tax return is the first to come across an agent’s desk, all future returns that come in with identical information should be flagged. This rule of thumb applies to filing personal and business income returns alike in case someone attempts to scam your business filing as well.

So, if you file Form 1040 to cover your personal taxes and Form 1120S for your S corporation’s small business taxes, filing both returns early is wise.

2. Avoid divulging personal information, especially your Social Security Number (SSN).

Avoid giving out personal information to others whenever possible. This includes business information. Your name, business address, date of birth, and Social Security Number could all be used by a scammer to unlock your financial activities and tax information. It’s particularly important to protect your Social Security Number as this 9-digit string could be used to file a fraudulent tax return in your name, which could negatively impact your personal and business taxes.

3. Consider adopting a formal small business entity.

If you conduct your trade as a sole proprietor or as a member of a general partnership, consider adopting a formal business structure for your venture. This could be an LLC, an S corporation, or a C corporation. Formally registered business entities enjoy limited liability protection and can help separate your personal and business assets. This can be a tremendous help in reducing the chances of small business tax fraud if a scammer were to get ahold of your personal information. Plus, formal business entities come with additional opportunities for tax savings, along with increased credibility.

4. Be on the lookout for Internet tax scams.

Be aware of online tax scammers. They are looking to take full advantage of gullible taxpayers. Some shysters will pose as legitimate IRS agents and send out phishing e-mails to a bulk e-mail list. They often claim that a person’s tax return is in need of further evaluation by the IRS and that the victim should send his or her Social Security Number to give permission for this so-called evaluation.

The IRS communicates with taxpayers via mail or phone, so you should never expect to receive any e-mail communication from Uncle Sam, even if a message appears to be from an official “.gov” e-mail account.

5. Keep all personal and business records safe, in order, and easily accessible to only you.

Any important personal or business documents you maintain should be neatly organized, kept in a safe place, and easily accessible when you need them most. Maintain hard copies and digital versions of important documents, such as invoices, profit-and-loss statements, and copies of your business income tax returns. This is an effective way to safeguard your home or office. Ensure your computers are password-protected and have up-to-date antivirus and antispyware software.

6. Regularly review your credit report.

Scam artists will do everything in their power to steal a credit card number. So, it’s critical to stay on top of your credit score and overall credit standing. There are various credit reporting services you can use to quickly evaluate your credit. Compare the results of more than one report, and look for any inconsistencies in this information. Business credit reports carry even more weight.

7. Proceed with caution when using mobile devices.

Most of us are attached to our mobile devices every day. It’s nice to use your smartphone or tablet to quickly accomplish a task, but don’t rely on these devices for everything. It’s generally safer to access and process personal and business financial data from a desktop/laptop computer, especially when dealing with your taxes. Also, if you can use a hard-wired Internet connection instead of Wi-Fi access, this practice can also help protect you from hackers.

8. Always use reputable business service providers.

As a small business owner, always work with service providers that you know are reputable. This includes anyone from a lawyer, to an accountant, to a painter who is assisting your business in some fashion. You’ll likely be giving these service providers some important information when doing business with them, so make sure they are not out to get you. It’s even more critical to find an established accounting firm to assist you to handle your small business tax preparation and filing needs.

It is impossible to completely avoid tax fraud. But if you take these precautions, you should significantly reduce your risk.

If you need help with your taxes, LegalZoom is here for you. Our legal help plan lets you speak with an independent attorney or tax professional about your business. Get help with tax fraud questions, legal advice, contract reviews, and more.