Avoidable Errors in Small Business Returns

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Better stock up on those sticky “Sign Here” notes for the coming tax season. The Internal Revenue Service (IRS) says the most common error made on tax returns is forgetting to sign it. Unfortunately, most errors are discovered during processing by the Internal Revenue Service (IRS), resulting in interest, penalties and possibly additional tax assessed for the taxpayer. To prevent simple, but potentially costly errors, the IRS urges tax preparers to carefully review all return for accuracy and completeness prior to filing.

Common errors made on Form 2553 – Election by a Small Business Corporation include:

  • Not filing before the 16th of the third month of the tax year in which the election is to take effect.
  • Incorrect or missing Employer Identification Number (EIN)
  • Missing Number of Shares on Schedule L, Form 2553
  • Missing the “dates Acquired” section on Schedule L, Form 2553
  • Missing or invalid effective date on Line E, Form 2553
  • Missing information in Part II, Form 2553 when the selected tax year is other than a December 31 year-end, or 52-53-week tax year ending in December
  • Filing Form 2553 to elect S-Corporation status for a Limited Liability Company (LLC) without first filing Form 8832 electing to have the LLC treated as an association taxable as a corporation
  • Filing Form 2553 for a corporation intending to be a qualified subchapter S subsidiary (Q Sub) when Form 8869 should be filed for this purpose
  • Form 2553 is received pursuant to Revenue Procedure Guidance, but does not include all documentation required by the procedural guidelines.

Instructions for filing Form 2553 can be found online at the IRS web site.

Once the S Corporation election has been made and accepted, the corporation files Form 1120S for income tax purposes and Form 1120-W for estimated tax purposes. Common errors found one Form 1120 – U.S. Corporation Income Tax Return include:

  • North American Industry Classification System (NAICS) code is incorrect or missing, or the Principal Business Activity (PBA) is still being used
  • Schedule L, Balance Sheet is missing or incomplete
  • Return not placed in proper sequence order per Form 1120 instructions
  • No explanation for short tax period
  • Use of an individual's name instead of the corporate entity name
  • Controlled Group information Page 3, Lines 1 and 2 is incomplete
  • Taxpayer includes unnecessary blank form or schedules with the return
  • Form 1120A filed for taxpayers with Gross Income exceeding $500,000 or are otherwise ineligible for filing 1120A.
  • Form 851 is missing or incomplete, if necessary, for a consolidated return.

Prepearers should also remember that certain large and mid-sized corporations are required to file their Forms 1120 and 1120S electronically. Directions for corporations required to e-file for tax year 2005 and guidance on e-file waivers for corporations unable to meet e-filing requirements can be found online at the IRS web site.

If a small business has employees, employment tax returns must be filed regularly. Common errors frequently occurring on Form 941 – Employer's Quarterly Federal Tax Return include:

  • Entity information, including the name and address, is illegible and/or incomplete
  • Schedule B, Supplemental Record of Federal Tax Liability is not completed
  • Multiple tax periods on one Form 941
  • No tax period marked on Form 941
  • Line entries not identifiable
  • Same entry repeated on lines 3 and 7d
  • Form 941 C not included when necessary
  • Form 941, Line 8 not complete.

Tax preparers should remind their clients who are employers that, according to Notice 1015 (rev. December 2005), they must notify each employee who worked for them at anytime during the year and for whom they did not withhold income tax, about the Earned Income Credit. For tax year 2005, the maximum amounts of income the taxpayer can earn and still be able to take credit for 2005 are:

  • Families having more than one qualifying child and earning less than $35,263 if filing individually or $37,263 if a married couple filing jointly or
  • Families having one qualifying child and earning less than $31,030 in filing individually or $33,030 if a married couple filing jointly or
  • Individuals earning less than $11,750 or married couples filing jointly earning less than $13,750, who do not have a qualifying child.

The amount of adjusted gross income (AGI) a taxpayer can have and still take the credit has also increased, as has the amount of investment income.

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