For most working adults, taxes are only an issue they consider once a year. Sometime between January and mid-April, they either go to a professional or sit down with specialized software to file a tax return. The process of filing a tax return helps validate the income taxes paid through employer withholding throughout the year.
Frequently, individual taxpayers receive a refund after successfully filing an income tax return. Occasionally, some people may fall short of their tax obligations. They may make mistakes or oversights that lead to audits and potentially criminal charges in more severe cases.
Independent contractors may actually have an increased risk of tax controversies when compared with the general public. Why are self-employed professionals more likely to face a significant income tax issue than an employee?
The need to pay all taxes themselves
Workers take for granted the convenience of having an employer withhold funds from each paycheck on their behalf. They don’t need to calculate their tax obligations because their employer makes estimated contributions to the appropriate authorities on their behalf.
Independent contractors and self-employed professionals don’t have that automatic withholding. Instead, they have to set aside a portion of their income as they earn it. They then send in quarterly estimated tax payments to the government. The failure to do so any year after the first year filing taxes as a self-employed professional could lead to sizable penalties. They may also pay more than they anticipate because they cover the portions traditionally paid for by employers.
The potential for complex returns
A self-employed professional may want to write off or deduct a variety of different expenses to reduce their overall taxable income. More complex income tax returns are more likely to generate small mistakes. Small mistakes can lead to an underpayment of income tax obligations. There could be penalties and interest assessed as a result. Self-employed professionals facing a tax controversy have the right to support throughout that process. They can have a lawyer present with them during any interactions with the IRS. They also have the right to representation should they find themselves facing criminal charges.
Reviewing communications from the IRS and recent tax returns with the assistance of a skilled legal team can help people respond to tax controversies. Those who recognize when they may be at risk of tax issues can take appropriate steps to protect themselves.
