I’ve been emphasizing for the past few years that, in the “information age” small business owners have to be far more careful about how they conduct business. “Hiding” anything is virtually impossible except on the short term. All that means is that interest and penalties will have built up by the time the truth is out. Don’t cheat. Push beyond accepting that easy solution – and besides being able to sleep nights, you will be rewarded with a stronger, healthier, more prosperous business.
To reinforce my point, the IRS has hired a small army new auditors. In fact, in every government agency all up and down the hierarchy, the only departments not being cut are audit. Since big business has big attorneys and tax agencies don’t understand how they operate anyway, they concentrate most of their efforts on small businesses – just like yours.
One current big push is being made by the Wage and Hour division of the Department of Labor. Between siding squarely with the Unions and wanting to stick it to every business they can conceivably make a case to stick, they are going to make life rough and expensive, for a great many small businesses. While governmental agencies have traditionally worked independently, technology and the need to maximize punishment now have them sharing information in more ways.
Even if you’ve never violated a single labor or IRS rule, you can still be penalized simply for not having your records readily available for the auditors. Unlike income tax records, ALL employment related records, starting with applications and ending with any paperwork that ensued after the employee left must be kept for a minimum of 5 years. I do mean every single shred of
paper. If you reprimanded them, rewarded them, piece work records, raise records, and more must be maintained. If you pay someone – especially if you get an extra benefit for it, like hiring your children – make sure you keep records. Nothing can be verbal and even if someone works the exact same schedule every single day of the week, write it down. Leave NOTHING to chance or verbal record.
Logically, you might think this applies only to employees, alas, it does not. It includes anything you pay anyone for at any time. “Anyone” includes corporations, LLCs, and sole proprietorships from whom you purchase goods or services. The IRS dishes out some very healthy penalties simply for not filing your 1099s:
$100 for each instance a 1099 Form is not filed with the IRS.
$100 each time a 1099 Form is not provided to the payee.
The maximum penalty is $250,000 for each type of non compliance.
Make sure you understand those rules and comply with those filing requirements as well.
