Good Habits for Business Owners as We Begin 2022 “Avoid the IRS”

As a business advisor, tax attorney, and consultant that works with closely-held businesses, including doctors and dentists, as well as other high-income earning individuals, we are always thinking about the idea of continuous improvement. So, recognizing that it is the beginning of the year, and we are all trying to focus in on our habits, I thought a discussion about business practices and creating good habits would be a great discussion. Hopefully you do as well.

Background and Introduction

The idea here is: let’s focus in on the good habits that we can create over time, one step at a time, without setting ourselves up for failure, and without focusing on the bad habits that we have already established. So, here we go. As business owners we sometimes are overwhelmed by life and the busyness that surrounds us. And, when that happens, things around us fail to get done or are simply ignored. In fact, we may be really good at taking care of our customers, clients, or patients, but we fail to take care of our own “house.” One area where that occurs is on the tax side with individual business owners failing to pay their estimated taxes, other tax liabilities, or filing their tax returns. Have you ever received a letter like this from the IRS?

What is the Bad Habit?

If you have received one of these IRS notices, it is really important not to procrastinate and ignore it. In fact, before we can focus on establishing good habits, we need to address the current circumstances related to the IRS notice. That is the first step towards creating the good habit. Here are my thoughts:  

1. First of all, and most importantly, we want to avoid any sort of criminal enforcement action by Criminal Investigation. Criminal Investigation refers to the Internal Revenue Service’s arm that investigates and prosecutes individuals and businesses for the failure to file and failure to pay their individual income tax liabilities. That should be goal number 1.

2. Recognize and acknowledge that you need help and then reach out for that help.

3. Identify and work with a well-qualified tax attorney that focuses their practice in the area of tax controversy. And, recognize that just because someone calls them self a tax attorney does not necessarily mean that they have the appropriate experience. Ask questions and make an informed decision as to that particular professional.

4. Also, identify a well-qualified CPA and bookkeeper to assist with whatever task may be necessary for the preparation of and filing of the relevant delinquent tax returns.

5. Then, work with that well-qualified tax attorney, CPA, and bookkeeper to get into compliance, both from a tax filing and tax payment perspective.

6. Then, as a business owner, identify and put into place your best practices to minimize the disruption going forward and to ensure timely payment of all taxes and timely filing of all relevant tax returns, as discussed below—the good habit.

The Good Habit and Best Practices

For Attending to Our Tax Obligations

Those best practices for our closely-held business owners that operate their businesses are the following:

1. First of all, determine what your strengths and weaknesses are, and surround yourself with folks that complement both your strengths and weaknesses.
   1. One of the areas that I have found very helpful in determining our strengths and weaknesses is the Working Genius by Patrick Lencioni. I would encourage you to take this assessment. Please see the website link, which I have listed at the bottom of this blog article.
2. Second, form and establish a team of professionals that you work with both internally and externally. That team of professionals will vary depending upon your individual and business circumstances. But, it would generally include a financial advisor, CPA, business and tax attorney, and, potentially, a business consultant or coach.
3. Third, meet with your CPA, financial advisor, or business consultant on a monthly basis to discuss your key performance indicators within your business and your overall financial circumstances, including your monthly business financials.
4. Fourth, calculate and pay your estimated federal and state tax liabilities monthly.
   1. To be clear, do not meet on a quarterly basis; do it on a monthly basis. I know that you will hear from many advisors about meeting on a quarterly basis and paying your estimated tax payments on a quarterly basis. But, after working with business owners for over 22 years, I have found that cash flow is king. Cash flow is very important for those businesses, and the individual owners on the personal side. So, if we are managing and paying our estimates on a monthly basis, the cash flow is more consistent and we avoid surprises at the end of the year, or early next year.
   2. Do you know how many times I have heard a business owner say: I had no idea I was going to owe this much? My CPA never told me. Is it the CPA’s obligation to tell you, or your obligation to stay on top of your business and personal matters?
   3. Do not attempt to blame, justify, or make excuses for your actions or inactions. We avoid surprises by calculating those tax liabilities on a regular and continuous basis and paying those liabilities on a regular and continuous basis. Think monthly, not quarterly.
5. Fifth, be self-aware and listen to your team and professional advisors.
   1. Listen does not mean follow. It simply means listen, consider all the facts and circumstances, and then make an informed decision from there.
   2. But, be willing to scrutinize yourself and truly be self-aware. The more humble you are and the more open you are, the better you will be, the better those around you will be, and the better your business will perform.
   3. And, as I like to say: The Path We Choose Will Determine Our Final Destination. So, take your time, listen, and respond accordingly.
6. Finally, ask questions and be well-informed about your business, while delegating, not abdicating, to the appropriate team member or outside professional. And, recognize that simply because you delegated a certain task to another does not mean you do not have to oversee and ensure that the task gets done. It is your responsibility.

If you take these very simple but powerful steps, and consistently apply them going forward, not only will you never find yourself receiving that IRS notice again, you will find yourself with more time to focus on both your personal life and business matters. So, think about making changes and forming good habits, “Poco a Poco,” little by little.

If you have questions, feel free to contact me. You can find additional information on the home page of my personal website here.

See the Working Genius assessment here. I would encourage you to take the assessment. It is a good one.