No small business owner enjoys prepping, filing, and paying taxes. But this year, data security issues add an element of risk to an already-painful process. To date, the IRS has been hacked twice. Reporting on the IRS hack, Jonathan Chew notes "This year's attack follows a massive data breach at the IRS in 2015, when hackers stole information from 330,000 taxpayers to successfully file bogus tax refunds and obtain $50 million in federal funds."
If you're a small business owner affected by these data breaches, the stolen information could be used against you—either now or later—and you may also at risk of being hacked when you file your taxes.
This year, in addition to offering small business tax tips and money-saving tax provisions, experts recommend ways that you can protect your business data leading up to—and during—the tax-filing process.
Cybercriminals Target Small Business
How did cybercriminals manage to hack the IRS in the first place? According to the article, they "used personal taxpayer data that was stolen elsewhere to help generate the PINs." Indeed, sophisticated cybercriminals hack lower targets first to obtain the information they need to attack higher targets like the IRS. Quite frequently these lower targets are small businesses.
For example, the now infamous Target hack began as an attack on one of the retail giant's small business vendors. And that model has been used in many data hacks since.
It's a vicious circle. Criminals steal data and security credentials from small businesses to attack large businesses and government agencies. Then they use the information they get from large businesses and government agencies to attack small businesses and swindle their tax refunds.
How can small business owners break this cycle, keep their data safe, and protect their tax refunds and credit scores?
Certainly you'll want to secure your databases, desktops, and mobile devices. For advice on how to do that, check out security-related articles on Small Business Computing. But to protect your tax information in particular, Tyler Moffitt, senior threat research analyst with Webroot, offers these small business security tips.
Small Business Tax Tips: How to Protect Your Tax Information
1. Avoid using search engines
Click on links that take you straight to the source. Poisoned search results may inadvertently lead you to dangerous, malware-infected websites. If you need tax-related information or need to download tax forms, go directly to www.irs.gov—the official IRS website—instead of using a search engine.
2. Update your software
Always download the latest updates to Windows, as well as any non-Microsoft applications you use to read PDF documents (such as Adobe Reader or Foxit Reader). These updates help prevent malware infections that take advantage of security vulnerabilities in those products.
3. Start with a clean machine
When preparing and collecting the information you need to file your taxes, you should always start the same way: perform a full scan of the computer with an up-to-date antivirus program. Do this before you log into your bank account or to any other website that may contain your private financial data, including your online tax filing service, if you use one.
4. Practice good password hygiene
Make sure you use complex passwords and change them frequently. If you have trouble remembering your passwords, use a credible password manager. For added protection, leverage two-factor authentication like biometrics if your computing device supports it (e.g., a thumbprint), and then use a second method of authentication such as a long password. Do not auto-save your login information, and when you finish an online session log out of any sites with sensitive account information, such as TurboTax or H&R Block.
5. Don’t use public Wi-Fi
If you check tax information in a public setting, do not connect to Wi-Fi hotspots—use your cellular network connection instead. Most hotspots and public Wi-Fi networks lack adequate protection and place your mobile devices, tablets, and personal computers at risk. Also, cyber criminals often create networks or URLs that sound similar to those in coffee shops, airports, or similar venues. Turn off Wi-Fi and Bluetooth settings on your computing devices if you don’t need them.
6. Consider your Web browser options
Do not use Internet Explorer to file your taxes. If you use Firefox, install the NoScript, AdBlock Plus, and the HTTPS Anywhere add-ons. When used in combination, they can prevent online threats from infecting your computers.
7. Don’t store personal information on your hard drive
When you're finished filing your taxes, collect your forms and tax return documents and burn them to a CD or DVD. Delete the tax record documents and returns from your computer's hard drive and clear the browser's history using the browser's privacy settings.
Small Business Tax Tips: Don't Email Financial Information
Security and privacy experts unanimously agree: don't communicate with your accountant by email, and do not let companies send you a 1099 or other financial information by email. Likewise, don't send 1099s and other sensitive financial information to your contactors via email. Remember, there's a reason the IRS never sends you an email. Don't let your small business send sensitive information by email, either.
"Too many small businesses share their tax information using unsecure methods like email," says David Martin, vice president of VeriFyle, an encrypted communication and file-sharing platform. "Email may be a convenient way to communicate with accountants, but it's also an easy target for hackers. You can find simple, highly secure, and affordable options for sharing information. From a security perspective—and for peace of mind—the little bit of extra effort is worth it."
The harm that comes from emailing tax information is greater than most people think.
"By filing fraudulent tax returns, identity thieves can forge not only your tax return, but the returns of your customers," says Nigel Johnson, vice-president of business development at Zix Corporation, an email encryption provider. Don't be the weak point that lets cybercriminals hack or harm your customers. That could kill your business and leave you liable to lawsuits.
Save Money: Small Business Tax Provisions
Once you've secured your tax data and your communications method, it's time to actually prepare and file the return. You might find these two tax provisions useful—be sure to discuss them with your accountant.
This provision lets business owners deduct eligible equipment purchases up to $500K, and it can be particularly helpful if you're a cash-strapped business owner.
"Section 179 applies to many things you wouldn't expect. It applies of course to machinery and appliances, but it also covers office furniture, vehicles, and non-custom software," says Priyanka Prakash, a finance specialist at FitBiz Loans, a finance and lending resource for small business owners. "It covers both purchased equipment, and in some cases, leased equipment. If you want to elect Section 179 on your taxes, you need to fill out IRS form 4562," he adds.
But this provision can help you more than you probably think.
"Say your small business spent $100,000 last year on a truck that has approximately a 10-year useful life," says Prakash. "Ordinarily, you might deduct $10,000 per year for 10 years. Assuming a 35 percent tax rate, that's a $3,500 deduction in taxes each year for 10 years. With Section 179, you can deduct the entire $100K in the tax year of purchase. Assuming a 35 percent tax rate, that's $35,000 in your pocket in one year."
Hiring Vets: The Work Opportunity Credit
You'll find another great tax break in the Hiring Vets: The Work Opportunity Credit provided that you hired a veteran, did the necessary paperwork, and met all the requirements.
"It's not a deduction, because it doesn't reduce income; it actually reduces the final tax bill, dollar-for-dollar," says Jessie Seaman, Esq., managing licensed tax professional (an attorney) at Tax Defense Network, a company that represents clients in IRS and state tax collection actions.
Ask your accountant to go over new tax provisions—or changes to existing ones—so that you can understand if you qualify for additional tax breaks. If so, you may need to provide more information to your accountant.
Small Business Tax Tips: Paying the Final Tax Bill
Having the cash on hand to pay the final tax bill can be difficult for small business owners.
"Small business owners typically pay taxes on a periodic basis and, in the meantime, they need every dime to cover their operating expenses," says Jonathan Barsade, CEO of Exactor, a sales tax software provider.
"They often use the funds they earmarked for taxes to pay for materials and to cover payroll—hoping to have enough money on hand when tax day comes," he says. "They frequently misjudge their future cash flow, which leaves them with no cash to cover the tax liability."
Most small businesses have faced that scenario at one point or another—sometimes repeatedly. The resulting fines and penalties can further cash-strap a company. So how can small business owners break that cycle?
Barsade recommends creating a separate bank account. "As money comes in, set it aside in that account so you aren't tempted to use it for other purposes," he said. "When tax day comes, you have the cash on hand to cover your liability."
You can also save money on tax filings by having all your records in order before you turn them over to your accountant. "Double check your records to make sure they're clear and understandable," said Michael Eckstein of EcksteinTaxServices. "Many accountants charge extra to fix unorganized records."
The easiest way to keep your records organized and accurate: automate your accounting as much as possible. "There is no reason for small business owners to spend more than an hour each month on all of their tax compliance needs," says Barsade. "The sooner business owners automate their accounting, the less time they need to work on their taxes. And that means more time to focus on the business."
Pam Baker has written for numerous leading publications including, Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, the NY Times, and Knight-Ridder/McClatchy newspapers.
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