Understanding Income Tax Reporting
Accurate income tax reporting is a skill organizations seek in their accounting team. In fact, it is a necessary skill if you want to grow in the organization where you work. If you are employed in an accounting firm, the matter becomes all the more important because tax reporting is one of the most popular services individuals and organizations hire firms like yours for. Though considered a basic aspect of accounting practices, understanding income tax reporting take some time and requires expert training before one can establish command over the various instruments, techniques, and institutes involved in the process.
What Does Income Tax Reporting Imply?
Income tax is paid to the government as a voluntary share in one’s income. The amount people and organizations pay under this tab goes on to support the various government-run programs, including healthcare, education, and others. Income tax reporting is done by submitting regular tax returns ? which is the fundamental reporting instrument for income, expenditures, and other related tax information ? to the IRS, which is the primary government authority in the United States that deals with all matters related to income tax recording and filing.
Reporting income tax implies a whole process that you should know by heart to be a great tax accounting professional. The process involves the following steps:
- CONFIRMING ELIGIBILITY: The first step is to determine whether the person, or organization, you are to perform income tax reporting are eligible for taxation or not, since there are a number of situations where your client may not be required to pay any taxes. For instance, people with very low income or those who are not legally adults, etc.
- FILING STATUS: Filing status is the legal family status of an individual. Having this information is crucial when you are filing an individual’s taxes. These include single, married, widowed, among others. You will have to submit documentary evidence with your tax return as proof of your filing status. For businesses, the legal structure of the organization determines the filing status, such as sole proprietorship, company, corporation, etc.
- EXEMPTIONS & DEPENDENTS: For individual clients, you will need to determine whether or not they can apply for any exemption for themselves and their dependents. Similarly, your business clients may also be eligible for exemptions. The amount of exemption depends on the amount of income reported, of course.
- ANNUAL REPORTING: Since the US government requires annual reporting of tax returns, you are expected to file your clients’ taxes once a year. You will also have to make sure you are using the right forms to report your clients’ taxes. The success of your income tax reporting also depends on whether or not you choose the right form for the tax return (We talked about it a little in the next section).
- TAX CREDITS & DEDUCTIONS: Lastly, you should also make sure you have properly reported any tax credits or deductions that your client qualifies for. Tax deductions allow your client to claim a discount in the actual taxable amount while tax credits are meant to decrease the actual taxable amount itself.
Ensuring Income Tax Compliance
To ensure income tax compliance, you will need to prepare for the task with correct knowledge and the right instruments (forms). For individuals filing for tax and small businesses, the reporting process is self-assessment based, which means they have to file their income and taxes on their own (or by hiring services of a tax accountant). However, for mid-sized businesses and large corporations, income tax reporting requires periodic audits to be conducted by external qualified professionals. If you work for an accounting firm, your employer is probably already providing corporate clients auditing services to ensure income tax compliance.
Taxation is serious business and those (individuals and businesses) who are eligible for paying taxes but do not do so will have to face appropriate penalties in accordance with the extent of their crime. A number of civil and criminal punishments exist to penalize tax evaders. Civil penalties among these are divided into four main levels:
- Delinquency penalty
- Information reporting penalty
- Accuracy-related penalty
- Penalties for preparer, promoter, and protestor
Each of these levels has multiple tiers when it comes to further distilling the penalties suitable for any given case. In general, delinquency penalties are for people and businesses that simply fail to file their returns in the assigned period. Similarly, information reporting penalties are imposed when the applicant is only expected to report certain information to the IRS.
Penalties related to accuracy of information provided in the returns are imposed based on whether the filer (your client) is found to have mistakenly put in the wrong numbers in the forms or deliberately filed lower income than they made. Of course, those committing deliberate fraud are heavily penalized for their crime.
The last level of civil penalties for income tax compliance issues happens to have the longest list of causes, all of which are related to abuse of the deductions, exemptions and credits aspects of the tax return. Since these goals are achieved by falsifying information, the penalties are often quite high. Apart from these, a number of criminal penalties are put in action upon egregious display of fraudulent activity in tax returns.
Our Income Tax Related Products
As you can see, the matter of income tax is very important and just as complex. There are a number of things that you need to learn to become a proficient tax accountant and help your clients with accurate income tax reporting. As a leading online institute that is helping professionals in all popular fields of work educate themselves with authentic knowledge and information, we understand where you are standing right now.
Lorman is here for your continuing education needs
If you need continuing education credits or simply need continuing education, Lorman education has over 30 years of experience to help. Serving over thousands of business professionals, Lorman online training and continuing education is a great way to earn your CE credits or build your professional knowledge base. Choose to take one course at a time or go with the Lorman All-Access pass which is an unlimited annual subscription. Start earning and learning today.
