Small business tax liabilities: Common pitfalls and the cost of noncompliance in 2026
Small business tax liabilities: Common pitfalls and the cost of noncompliance in 2026
The fiscal landscape of 2025 was defined by the One Big Beautiful Bill Act (OBBBA). It solidifies a number of the tax cuts introduced in 2017, in addition to including a number of previously absent provisions that have wide-ranging implications for organizations and individuals.
Building on this statutory baseline, changes to the tax code and enforcement for 2026 have their own significance. Standard deductions for single filers are up to $16,100 or $32,200 for married couples filing jointly. From a business perspective, the ending of the clean energy tax credit incentive, which expired at the end of 2025, is equally relevant. There are also various other granular rule changes and requirements being introduced and phased out in the wake of OBBA, creating further complexity.
Concurrently, the IRS faces having its enforcement funding cut by 34% in 2026, while the number of staff committed to this process is also down by 31%. The Urban-Brookings Tax Policy Center argues that cutting the enforcement budget increases the likelihood of errors in returns due to the lack of clarity provided prior to filing deadlines.
In this article, Tax Law Offices examines the common pitfalls and costs of noncompliance for small businesses in 2026
Tackling the Tax Gap
According to the Federal Tax Compliance Research data released by the IRS, the agency is combating a widening “tax gap,” the fiscal variance between true tax liability and the amount paid on time.
Gross tax gap data for the most recently available year comes from 2022 and was reported as $696 billion. This figure is derived from the true tax liability of $4.635 trillion. The net tax gap in this report is $606 billion, the portion that the IRS accepts will never be recovered. That leaves $90 billion, which gets recouped via various methods, whether voluntary repayment after the deadline or active enforcement.
Exploring Audit Triggers
The IRS may audit individuals and organizations to determine whether their tax liability has been correctly calculated and reported or whether there are discrepancies that need addressing.
Audit selection criteria remain opaque, and officially, it can be carried out entirely at random, as well as due to algorithmic analysis determining that a tax return falls outside “normal” boundaries. If a return is flagged as out of the ordinary, it will likely subject the business that filed it to increased regulatory scrutiny.
Commonly recognized audit triggers include the mixing up of personal and business expenses, leading to inaccuracies in a return, as well as payroll tax errors, which are more likely in small businesses that rely on hiring external contractors to fill internal skill gaps on a short-term basis.
In addition, the IRS notes that audits may be carried out if your business overlaps with returns filed by other organizations or individuals that are already in the process of being audited. Proactive risk mitigation is essential even if you have no immediate reason to expect that an audit is inbound.
Considering Noncompliance Costs
Much is made of the costs businesses incur in tax compliance efforts. The IRS publishes its own estimates for out-of-pocket compliance costs, which, in 2024, were pegged at $133.3 billion.
While this operational expense is significant, the federal penalty structure renders noncompliance fiscally unsustainable. The statutory framework compels adherence through compounding interest and aggressive failure-to-file charges.
The latest IRS guidance on this includes interest accrued at the federal short-term rate at the time, with 3% added to this irrespective of external economic factors. Late payment penalties of 0.5% per month, capped at 25%, also apply. Late-filing penalties are 5% monthly, capped at 25%.
The implication of this liability structure is that tax liabilities must be treated as a business risk management issue, with all the associated complications and caveats.
In the face of all the new realities facing small businesses in 2026, legal experts recommend that organizations work with specialists in this field to avoid missteps. Support from professionals who already know the ins and outs of OBBA is invaluable in this context.
The Future of Small Business Tax Responsibilities
Regulatory adherence is critical, especially in a small business context where the margins for mistakes are narrower, and the fallout of an auditing event or a penalty being issued will be that much more severe.
Organizations that lack the in-house ability to adequately manage their tax liabilities and the associated operational risks they represent must look to experts for assistance. The potential costs of noncompliance far outweigh any initial complexities.
This story was produced by Tax Law Offices and reviewed and distributed by Stacker.
