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What Happens if the IRS Disallows Your Business Deductions?

On Behalf of | Dec 2, 2022 | Taxes

Depending on your business structure and its overall success, the deductions you are able to make when filing your taxes can drastically affect your final tax responsibilities. Businesses can write off expenses related to meetings, advertising and even office supplies. Doing so allows them to reduce their overall reported profits and therefore, how much they have to pay in income taxes.

Many companies expend significant effort tracking their operating expenses so that they can maximize their write-offs and thereby minimize their overall tax obligations each year. Workers may need to retain receipts for all kinds of company purchases for this exact purpose.

Unfortunately, some accountants or business owners become overzealous while adding up the year’s business write-offs. Sometimes, companies attempt to write off expenses that the Internal Revenue Service (IRS) later determines do not qualify. What happens when the IRS disallows your write-offs or deductions?

You will likely have a large tax bill

Perhaps there were personal expenses included with business deductions, or maybe the IRS determined that what you claimed were normal operating expenses were not common for your industry. Mistakes with deductions and write-offs will inevitably lead to an underpayment of taxes.

The bigger the amount of disallowed expenses, the more you will likely owe in past-due taxes. Companies could owe tens of thousands of dollars in unexpected taxes, and unless they have assets on hand to cover those amounts, they may need to make payment arrangements that lead to even more expenses.

You will typically need to pay not only the taxes the IRS determines are due but also interest on those amounts. There could also be penalties and fines assessed depending on the scope of the issue. In some cases, criminal charges may result. When issues with a business’s taxes lead to a large amount of unpaid business income tax, the IRS may prosecute owners, executives or accountants.

Those facing business audits, large, unexpected tax bills or criminal charges related to tax fraud will typically require help when dealing with the IRS. From negotiating a payment arrangement to reevaluating the financial records, there are many possible ways to minimize the consequences of business tax issues that could lead to financial penalties or criminal charges.

Notice: We are providing this as general information only, and it should not be considered legal advice, which depends on the facts of each specific situation. Receipt of this content does not establish an attorney-client relationship.