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Quick Guide to Tax Reporting
When it comes to tax season, it can be a stressful time for individuals and businesses alike. Tax information reporting is a requirement for organizations to report their wage and non-wage payments to the Internal Revenue Service (IRS). This area of government reporting is continuously growing with new regulatory requirements for federal and state levels. It is important to keep track of your tax reporting due to its complexity with over 30 types of tax information returns required by the federal government.
The most familiar tax information return is the Form W-2. This form reports the wages and compensations paid to employees. Although this is the most widely recognized and used form, it is important to know as a business owner there are other forms necessary to be filed. Some include non-wage income, and report transactions forms that may generate a credit on a tax return. With the number of forms that need to be filed, it is necessary to keep close track of your reporting. The three non-wage forms are the Forms 1099 (consisting of 16 types), Forms 1098 (which there are four types), and Forms 5498 (which are three types).
With each information return, you are reporting a different type of transaction. The complexity continues as each return has its own regulations on when, what, and the amount to report varies from type of transaction made. Due to the amount of information, many filers handling large volumes rely on third party information reporting software. Some of the varieties of information returns that occur are reports on interest paid on deposits at financial institutions, income on the sale of real estate, and payment from pensions, annuities, retirement and profit-sharing plans.
The growing complexity of the tax laws is to help reduce the possibility of businesses and individuals from underreporting their income or wages. Underreporting holds one of the IRS’s most devastating penalties. If proven you are underreporting, the IRS will charge a 75% tax fraud penalty on the underpayment amount. Some other penalties that may occur with pour tax reporting are failure to file penalty/late filing penalty and the failure to pay penalty/late payment penalty. These penalties can easily be avoided by filing your return by the due date. It is important to get the tax reports in on time and have any taxes owed paid. The penalty for failure to pay owed taxes is .5% a month for any outstanding taxes, which for a small business can be a devastating loss.
One way to avoid penalties due to tardiness or lack of knowledge is to outsource your tax reporting to a third party accountant. The accountant will work closely with your organization throughout the year in order to keep all tax reporting information organized. If you cannot afford to have a full time accountant in office, this may be a suitable alternative. The work will be done by a knowledgeable accountant that knows all the tax codes. Many times this can lead to higher returns or lower taxes owed using legal loopholes. By outsourcing your bookkeeping you will know that all laws are being followed all while giving you more time to concentrate of the essentials of your business allowing you to grow even quicker than before.