Tax Compliance 101: The Ultimate Guide

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Every citizen or business owner must report their income or assets by paying the appropriate taxes.

Think of it as your contribution to helping the government manage the economy so that jobs and businesses can continue, allowing you to keep earning from them. A win-win situation, that’s what it is—as long as you comply with tax reporting or filing. Otherwise, you will incur fines, which can be costly.

Paying taxes can be a complex activity, considering that tax laws can vary from one state or country to another. It can also be challenging to monitor all the tax requirements you need to comply with—this is why it’s a good idea to hire tax experts or professionals to assist you.

All things considered, you’ll want to learn as much as you can about taxes, which is what this guide is for. It’s your source for everything you need to know to be tax compliant, whether you’re a business owner or an expat working away from home.

Table of Contents

What is Tax Compliance?

Tax compliance is the act of abiding by tax laws and regulations being implemented in a particular state, country, or international community. That makes the annual filing of tax returns every April part and parcel of tax compliance for working individuals.

For businesses, tax compliance involves additional payment of other tax types. For example, companies that own buildings or facilities have to pay property taxes for such assets and excise taxes for the use of certain goods like fuels or other environmental products.

In the grand scheme of things, tax compliance plays a major role in financing government services designed to improve the public’s lives. Governments use taxes to fund health and education programs, unemployment and disability benefits, national defense and security programs, roads and bridges, and so on.

Ultimately, tax compliance helps boost economic stability.

A sign in Harlingen, Texas taken in 1939.
A sign in Harlingen, Texas taken in 1939. (Image source: Unsplash)

As a legal obligation, tax compliance necessitates timely and accurate payment of taxes. Failure to do so would warrant fines to the Internal Revenue Service (IRS) or other tax authorities.

Non-tax compliance may come in the form of tax avoidance and tax evasion. Both involve devising ways to pay the lowest tax bills possible. The difference is that the latter is an illegal scheme that could result in a lawsuit involving fines of up to $250,000 and $500,000 for business organizations.

Depending on the severity of the offense, the punishment could even include a criminal charge.

Besides hefty fines in back taxes and numerous fees, non-tax compliance comes with significant consequences for offenders, including travel restrictions, such as revocation of your passport, and frozen assets. You risk giving up all the money or property you’ve accumulated, as you’ll be forced to pay your tax debt to the government.

Altogether, these forms of punishment can affect your employment opportunities or business reputation. Meanwhile, governments’ tax revenues go down. That means they may not be able to support public welfare programs and services, which might also concern you in the long haul.

For a more in-depth discussion on tax noncompliance, read: What Happens If You’re Tax Noncompliant?

Tax Audits: What Are They and Why Do They Matter?

Under the tax system, the IRS conducts annual tax audits to ensure that taxpayers report their income and pay taxes correctly. The IRS may review tax returns from three to six years back, depending on their findings of the accuracy of tax records.

Suppose your current reported income shows an increase from your last year’s tax return, but your tax liability doesn’t add up properly with your higher income—then you may need to reconcile your income tax return. Or let’s say you brought in an investor for your business—the IRS may require a tax audit on your company.

These are common scenarios that may prompt an audit from the IRS, but tax audits aren’t necessarily done due to issues, discrepancies, or errors on tax returns. They also give the IRS regular opportunities to review its tools or processes and make the tax system as efficient as possible.

"Tax Audit" written in red marker

3 Types of Tax Audits

The type of tax audit you will undergo determines the steps you’ll need to follow. Here’s a rundown of the processes for mail, office, and field audits.

1. Mail Audit

A mail audit is the most common and simplest type of tax audit for individual taxpayers. Here, you’ll receive a letter from the IRS along with information on your tax return.

All you have to do is review and verify the information in the document and mail them back to the IRS within 90 days. The safest method to use in submitting your documents is a certified mail service like USPS or other similar delivery methods.

Tip: It would help to include a list of the documents you’re mailing, especially if you’re submitting multiple or additional documents.

2. Office Audit

Also called a desk audit, an office audit involves going to an IRS office and meeting an IRS auditor in person to discuss your financial records. Office audits may apply to your business, or they may also take place if you’re in special circumstances that may complicate your individual tax return.

You can use office audits as an opportunity to present your documents to IRS auditors and answer any questions they may have. The IRS will arrange an office audit with you by sending an audit letter containing their contact information and instructions for your visit.

3. Field Audit

Field audits involve visits from IRS representatives at your home, business headquarters, or the company accountant’s office. You’ll receive a notification from the IRS about the location and time of the visit.

The goal of the audit is to let the IRS have a close look at your financial documents, which may not be convenient if it were done via mail audit or office audit.

You can find more information in our blog post: Top 9 Tax Compliance Issues for Businesses

5 Tips to Ensure You Are Tax Compliant

U.S. entrepreneurs and business owners living abroad must continue observing tax compliance. Whether you’re running a start-up or corporation outside of the United States, you can follow these tips to help you develop a strategy in tax compliance.

1. Know the basic requirements.

Taxes can be a complicated matter, but it all boils down to one thing: you must know and understand your obligations.

The types of taxes you must pay, financial information you need to gather, tax forms to accomplish, date of filing, the tax collection agency in your place of business—knowing these can help you plan and develop a strategy to cover your bases when entering financial transactions for your business.

2. Always keep your records accurate and updated.

Many tax compliance problems can be avoided if financial records are up to date. It’s easier to create accurate financial reports for your tax filings if you set aside time every week or month to review invoices, payments, and the like, instead of doing things hurriedly because the deadline for paying tax obligations is fast approaching.

3. Stay up-to-date with tax laws and legislation.

Changes in tax laws are common at the state, federal, and international levels. The ever-changing nature of tax legislation makes it necessary to keep yourself informed of new processes in reporting and filing your tax returns.

4. Seek help from a certified tax professional.

Getting help from certified tax professionals is a helpful step in your tax compliance efforts. Tax professionals have a wealth of experience in helping individual and corporate taxpayers become tax compliant with their thorough understanding of tax laws and requirements.

In the United States, Tax Samaritan has provided professional and expert advice to American expats and taxpayers in various states, allowing them to pay taxes without any difficulty.

5. Organize your documents.

Tax audits and filings involve submitting official financial records of your employment or business, so make sure to keep copies of essential documents. These include receipts, reimbursements, bills, ledgers, and other forms documenting your income or loss of income, as the case may be.

Discover more tips and advice from our blog post: Follow the Tax Resolution Process in 7 Easy Steps

Stay Tax Compliant with the Help of Tax Samaritan

Tax reporting, filing, and payments don’t have to be a burden for you or your company. You can entrust all tax-related activities to our tax professionals at Tax Samaritan.

Our tax preparation services and solutions are designed to help expats and businesses remain compliant with tax laws, helping them avoid fines and penalties and saving them money. Additionally, Tax Samaritan can assist you with tax planning to reduce your tax obligations through legal measures.

Get your best tax quote from Tax Samaritan today!

All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.

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