There are many distinct red flags that the IRS looks for when dealing with small business audits and tax records. Some of these red flags include disproportionate deductions, which are deductions that are unusually high when compared to your business’s income. Expenses are expected to be fairly ordinary and necessary by the IRS. Unreported income is another red flag, especially if it contradicts any of the tax forms you’ve already filed.
IRS Problems for Small Business Owners in Texas
Owning a small business can be very rewarding and exciting, but it can also come with a unique set of problems. It’s vital to the continued success of your business that you address these problems as they arise or act preemptively to avoid them entirely. This is especially true with tax problems. While Texas has a relatively business-friendly tax environment, it’s still important to recognize IRS problems for small business owners in Texas.
As you attempt to navigate a complex situation with the IRS, you may want to seriously consider hiring a tax debt attorney for help. State and federal tax laws can be difficult to understand without experienced legal assistance in your corner, even if Texas IRS laws are generally less strict with small businesses than those of other states.
IRS Problems for Small Business Owners in Texas
Small business owners are the lifeblood of the Texas economy. There were 3.3 million small businesses in Texas in 2024. In 2025, there were 3.5 million. Small businesses account for 99% of all businesses in the entire state and 45% of all employees in the state, with the current employment rate in the state at 62.1%, according to the U.S. Census Bureau. Tax issues can cause serious strain on your business and could even result in financial losses.
It’s important to recognize potential IRS problems with your business. If you are concerned about any tax issues related to your business, you should hire a income tax lawyer to look through your financial records and identify potential solutions. The last thing you want is for a seemingly insignificant tax issue to evolve into a problem that could compromise your business.
Here are some of the most common IRS problems that Texas small business owners might have to deal with:
- Payroll issues. One of the major triggers for IRS attention is failing to deposit employment taxes in a timely manner. Your employees deserve to be paid on time, regardless of payroll issues. It’s vital that you address any payroll issues immediately, or your employees’ livelihoods could be jeopardized, which would then hurt your business.
- Misclassification. Under state and federal tax laws, you must properly classify your business and your employees as W-2 employees, independent contractors, or whatever else they are considered to be. If you incorrectly classify your employees as independent contractors, the IRS may assume that you did that solely to avoid payroll taxes. This can trigger an audit, penalties, and possibly even back taxes.
- Unpaid estimated taxes. It’s always a wise move to set aside some money for quarterly estimated tax payments. If you don’t set aside money to pay for these taxes, it could lead to a significant increase in interest and serious penalties when the time comes to file your tax return.
- Mixing personal and business expenses. It’s always recommended that you keep your business records completely separate from your personal records. Combining your personal and business financial documents, even accidentally, can result in IRS auditors reaching the wrong conclusions about your tax return.
- Failure to file. Arguably, the biggest mistake you could make regarding your taxes is failing to file them. You are legally required to file your own taxes and your business’s taxes. The way you file your business taxes is dependent on its structure. If you are unsure of your business’s structure and how to file taxes, you need to consult with an experienced tax court lawyer as soon as possible.
FAQs
Hire a Tax Lawyer for Help
David B. Coffin can bring decades of experience with clients’ tax issues to your case and give you a chance to right any IRS wrongs you’re dealing with. There are many important details to consider when you own a business. You don’t want an unresolved tax issue to get in the way of your business and cause a stressful situation. At David Coffin PLLC, we can determine the right course for your case. Contact us to speak to someone on our team who knows what to do.
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