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When a business tax return includes deductions that the IRS rejects

On Behalf of | Nov 14, 2023 | Tax Law

Running a successful business is incredibly expensive. Thankfully, the Internal Revenue Service (IRS) does allow business owners to deduct certain expenses from their company’s gross income when preparing an income tax return. Business owners can use deductions for travel expenses, facility maintenance and employee benefits. However, the deductions available change every year. It is very easy to include appropriate deductions but to ultimately calculate their value improperly.

Additionally, both the person filing the taxes and workers reporting deductible expenses can sometimes misunderstand whether certain costs are deductible. What happens if the IRS reviews a tax return and rejects specific deductions?

The company will likely owe more in taxes

If the IRS discovers issues with a tax return, it will send formal notice to the taxpayer. In some cases, there may be a revised return required. Other times, the taxpaying business may be subject to additional tax obligations and penalties. Improper deductions usually result in an underpayment of income taxes.

Receiving notice that the IRS has questions about certain deductions will usually lead to one of two conclusions. Occasionally, the IRS will decide that further review is necessary. They will send notice of an upcoming audit. Other times, it is clear that only a few of the deductions are inappropriate, so the IRS will send a revised tax bill. The company may end up owing a substantial amount in taxes. The IRS may also assess penalties and interest for the taxes that the organization failed to pay.

Any organization embroiled in a tax controversy has the opportunity to respond. They can bring an attorney to an audit or submit revised returns with additional documentation. Depending on how the company handles the notice from the IRS, there could be consequences that affect the company’s reputation or financial solvency.

Understanding what happens after a mistake with tax deductions may help executives and business owners respond to surprising letters received from the IRS. Seeking legal guidance as proactively as possible is generally the best way to seek that necessary clarity.