Written By: Michael Vale
Reviewed By: Bridgette Austin, Esq., EA, Co-Founder and Tax Attorney
Last Reviewed: June 26, 2026
A $10,000 tax bill you ignore for a year rarely stays $10,000. Stack the failure-to-file penalty, the failure-to-pay penalty, and daily interest, and that balance can pass $13,500 inside twelve months. That gap is the real cost of a tax compliance slip, and almost every case that lands at a Michigan tax resolution firm started as a small, fixable mistake.
Tax compliance comes down to two habits. File every return you owe, and pay what is due on time. Miss either one and the IRS, along with the State of Michigan, starts stacking penalties, then collection notices, then liens and levies. Below are the seven mistakes that break compliance most often, and how to fix each one.
What Does Tax Compliance Actually Require?
Tax compliance means two things. You must file every federal and state return the law requires and pay your current taxes on time so you do not fall behind again. If you owe back taxes, compliance comes first because the IRS requires all missing returns before it will consider a payment plan or settlement.
That sounds simple. In practice, the gap between owing nothing and owing thousands comes down to one of the slips below. Our tax compliance work starts by pulling a client’s IRS account to see which returns are missing, because you cannot fix a problem the IRS has not flagged yet.
Are Your Workers Employees or Independent Contractors?
Getting this wrong is one of the fastest ways for a business to fall behind on payroll taxes. The IRS uses a common-law test to determine worker classification, looking at who controls the work, who controls the money, and how the business and worker define their relationship.
Treat someone as a contractor who should be an employee, and you can owe back payroll taxes, penalties, and the share you never withheld. We have watched Michigan businesses get hit years later, often after a former contractor files for unemployment. Put the classification in writing before the first paycheck, and if you are unsure, ask before the IRS decides for you.
The Shoebox Approach to Recordkeeping
Sloppy records are where deductions disappear and audits get ugly. If you cannot document an expense, the IRS can disallow it, and in an exam the burden of proof is on you.
The fix is simple. Use software like QuickBooks or Xero, connect your business accounts, and scan receipts as you go. Good records protect your deductions and keep your return accurate, which keeps you off the IRS’s radar.
Actually, the bigger problem usually is not the missing receipt. It is the missing return. Plenty of people keep decent books and still do not file, which is a far more expensive mistake. More on that below.
Skipping Quarterly Estimated Payments
When no employer withholds tax from your pay, the IRS expects estimated payments four times a year. Miss them and you owe the balance plus an underpayment penalty at filing, even if you pay in full in April.
This trips up the self-employed constantly. A strong quarter gets spent, the estimate never goes out, and one missed year becomes a return you cannot cover, then two. The fix is dull but it works. Bank a set percentage of every payment in a separate account on payday. If you are self-employed in Michigan and already behind, we can help you catch up before it compounds.
Mixing Business and Personal Money
One bank account for everything is a compliance problem waiting to happen. When business and personal funds run together, your records blur, your deductions look questionable, and the legal wall between you and your company starts to crack.
For an LLC or corporation, that blurred line can let a court pierce the corporate veil, putting your personal assets on the hook for business debts. Even as a sole proprietor, mixed funds mean messier returns and weaker proof if you are ever questioned. Keep one business checking account and one business card. It is the cheapest fix here.
Leaving Deductions on the Table
Overpaying is a compliance mistake too, just one that costs you instead of the IRS. The tax code lets you deduct ordinary and necessary business expenses, and skipping the legitimate ones means handing over money you never owed.
The ones people miss most: a home office used only for work, mileage on a personal vehicle used for business (keep a log), software and subscriptions, and professional development like courses or conferences.
People skip the home office deduction because they still think it is an audit magnet. That has not been true for years. Claim what you are owed, document it, and you lower your bill without raising your risk.
What Happens If You File Late or Don’t File at All?
This is the mistake that turns a manageable bill into a real problem. The IRS charges late filers twice, and the two penalties are not the same size.
The failure-to-file penalty is 5% of the unpaid tax per month, up to 25%. The failure-to-pay penalty is 0.5% per month, also capped at 25%. So filing late costs ten times more than paying late, which is why you file on time even when you cannot pay. If your return runs more than 60 days late, a minimum penalty applies too, the lesser of $510 or 100% of the tax for 2025 returns.
| Charge | Rate | Cap |
|---|---|---|
| Failure-to-file penalty | 5% of unpaid tax per month | 25% of the tax |
| Failure-to-pay penalty | 0.5% per month (0.25% on an approved plan) | 25% of the tax |
| Interest | Federal short-term rate plus 3 points, compounded daily | No cap |
On a $10,000 balance, combined penalties and interest can pass $3,500 in the first year alone, and the interest never stops, reset quarterly and compounded daily.
If you have already fallen behind, the prevention checklists stop helping. You still have options. An installment agreement spreads payments over time. Currently Not Collectible status pauses collection when you cannot pay at all. Penalty abatement can wipe penalties for reasonable cause or a clean record. An Offer in Compromise can settle for less than you owe, if you qualify.
That last one gets oversold. The pennies-on-the-dollar ads make settlement sound routine. It is not. In FY2025 the IRS accepted about 5,500 of the nearly 39,000 offers it received, roughly a 1-in-7 rate, according to the IRS Data Book. Most rejections trace to incomplete financials or to people who could pay on a plan. Run the free IRS pre-qualifier tool before you spend a dollar.
Be careful who you call. In January 2026 the FTC warned about a wave of scam callers using fake names like the Tax Resolution Oversight Department and pushing fake IRS liability reduction programs. The real IRS does not cold-call; it contacts you by mail. Ignore the notices and a tax lien or a wage levy comes next.
Did the 2025 Tax Law Change What You Owe?
Tax rules do not sit still, and 2026 is a clear example. The 2025 tax overhaul, signed in July, made many 2017 tax cuts permanent, added temporary breaks for tip and overtime income, raised the SALT deduction cap, and tightened some reporting rules.
When the rules shift, honest mistakes rise, and so do the scams built around the confusion. The National Taxpayer Advocate has warned that 2026 could be a harder year for anyone who hits a problem, as staffing cuts slow IRS service. You do not need to track every change, just a reliable way to stay current before you file.
The Bottom Line on Staying Compliant
All seven mistakes share one trait. Each is cheaper to fix early than late. A misclassified worker, a skipped quarter, an unfiled return, none of it improves with time, and the IRS’s math, penalties stacked on penalties and interest compounding daily, rewards people who move fast.
If you are already behind, the answer is not to panic or to call the first number that texts you about back taxes. File what is missing, get current, and pick the resolution that fits your finances. That is what tax compliance buys you, a clean slate with the IRS and the State of Michigan. The taxpayers who get there fastest bring in an experienced tax team that handles these cases daily and talks to the IRS directly.
FAQs
What is tax compliance?
Tax compliance means you have filed every tax return you are required to file and you are paying your current taxes on time. For taxpayers with back taxes, the IRS treats compliance as a prerequisite and will not approve a payment plan or settlement until all required returns are filed.
What happens if I do not file my tax return?
Not filing triggers the failure-to-file penalty of 5% of the unpaid tax per month, up to 25%, plus interest that compounds daily. The IRS can also file a substitute return on your behalf, usually without the deductions you would claim, and then start collection through liens or levies. Filing, even late, almost always costs less than not filing.
What is the success rate of an IRS Offer in Compromise?
It is low. In FY2025 the IRS accepted about 5,500 of the nearly 39,000 offers submitted, roughly a 1-in-7 acceptance rate, according to the IRS Data Book. Most rejections trace back to incomplete financial information or the IRS deciding the balance could be paid through an installment plan.
Are tax relief companies that call about back taxes legitimate?
Usually not. The FTC warned in January 2026 about scam callers using official-sounding fake names and promising programs that do not exist, and the real IRS makes first contact by mail, never an out-of-the-blue phone call. Legitimate help comes from credentialed professionals like CPAs, enrolled agents, or tax attorneys, not cold callers demanding immediate payment.
Do I have to pay quarterly estimated taxes?
If you are self-employed or earn income without tax withholding, the IRS generally expects estimated payments four times a year. Skip them and you face an underpayment penalty at filing, even if you pay the full balance in April. Setting aside a fixed percentage of each payment in a separate account is the simplest way to stay current.
Bridgette Austin, Esq., EA, spent three years at Michigan State University’s Tax Clinic representing low-income taxpayers before the IRS – two as a student clinician, one as a post-graduate fellow. That work shaped her practice. A Bellaire, Michigan native with a Northern Michigan University bachelor’s and an MSU law degree, she now resolves IRS and State of Michigan tax debt cases at Austin & Larson.
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