One of the frightening things about tax debt is that it can accumulate quickly, and it’s often difficult to understand exactly where it comes from. If it is not addressed, it can also lead to serious financial problems for the business. One of the first things we’ll do when you come to us at Emergency Accounting is help you understand the reasons behind your tax debt.

In most cases, it boils down to one of these five causes:

1)    Failure to File Tax Returns

One of the most common ways that businesses accumulate tax debt is, simply, by failing to file their tax returns. If a business fails to file a tax return, it may be subject to penalties and interest charges, and this is what starts turning the tax debt into a snowball, gathering size as it rolls down a hill. The longer you continue to ignore the debt, the bigger it grows.

It is important for businesses to file their tax returns on time, even if they cannot pay the full amount owed. The ATO offers payment plans and other options for businesses that are unable to pay their taxes in full at the time of filing. Furthermore, if your business would be put under financial stress, it may be possible to negotiate a reduction in the debt. However, again, this can only happen if you don’t ignore the debt and get on top of it early.

2)    Underreporting Income

Another way that businesses accumulate tax debt is by underreporting their income. Businesses may do this by failing to report all of their sales or by taking deductions they are not entitled to. The ATO takes a dim view on this, and underreporting income can lead to serious consequences, including penalties, interest charges, and legal action.

To prevent this happening, businesses should keep accurate records of all of their income and expenses to ensure they are reporting their income correctly. They should also be aware of the tax laws and regulations that apply to their business and, if there is any question about any of it, rather than guess, the business should talk to the team at EPAS. 

3)  Misclassification of Employees

Misclassifying employees can also lead to tax debt for businesses. If a business classifies its employees as independent contractors, it may not withhold the appropriate taxes from their pay checks. This can result in the business owing back taxes and penalties to the government.

To avoid misclassifying employees, businesses should be familiar with the criteria for determining whether a worker is an employee or an independent contractor. They should also keep accurate records of the worker's status and pay them appropriately based on their classification. This is also something you should speak to the team at EPAS about if you have any question about it whatsoever.

4)  Failure to Pay Payroll Taxes

Businesses are required to withhold payroll taxes from their employees' pay checks and pay them to the government on a regular basis. Failure to do so can result in substantial tax debt for the business.

If your business is struggling to pay its payroll taxes, you should immediately talk to the team at EPAS to diagnose why you’re finding it hard to meet this obligation. Not only will we audit your business and determine how to address the payroll tax issue, but we’ll negotiate with the ATO on your behalf to come up with a solution for your growing debt.

5)    Unpaid GST

Businesses that sell goods or services may be required to collect a GST from their customers and remit it to the government. Failure to do so will result in the debt burden being placed on the company.

To avoid having the ATO investigate your business and find discrepancies, you should keep accurate records of your sales and collect the appropriate amount from your customers. It’s also important to make sure that you file your GST taxes on time with the ATO.

In the current challenging economy, tax debt is an avoidable expense that can seriously damage your business. Being accurate with your record keeping and making sure you don’t accidentally use the money in reserve for tax for the purposes of cashflow will help you keep your business in a strong position.

And, if you have any concerns about your tax debt and the health of your business, contact the team at EPAS right away. The sooner we can start working with you, the sooner your business will recover, and you will have peace of mind.