End-of-Year Tax Checklist for Individuals and Small Business Owners: Avoid IRS Problems Before Tax Season

Thinking About Taxes:

If you are like many people, the end of the year is a time for some reflection. It’s a time for thinking about things like personal accomplishments and challenges, professional growth, and especially financial matters. Whether you experienced financial gains or losses, there are tax implications just around the corner in the new year. As tax season approaches, taking proactive steps now can save you stress and money down the road. Creating an end of year tax checklist can streamline this process. Whether you’re an individual taxpayer or a small business owner, these actionable tips will help you wrap up the year with confidence and avoid IRS problems down the road.

The Proper Mindset:

For individual taxpayers and small businesses alike, it is tempting to hurry to usher out the old year, close the books, and move on to new opportunities. That’s understandable, and moving on is a good thing to do. And when it comes to taxes, we really do want to take the time to make sure that we are putting the old year to rest and walking into the new year. Unfortunately, rushing the year-end process (or not having a process) leads many tax preparation clients to become tax resolution clients. They carry old tax years on their backs under the heavy burden of IRS audits or back tax problems like liens, levies, and seizures.

On the other hand, having a good year end tax plan can help taxpayers get ready for their meeting with their return preparer, tie up loose ends, catch up any missed or “short” tax payments. It’s also a good time to locate those easily-misfiled documents and receipts that suddenly become very important when the IRS auditor comes around. Remember, preventing IRS problems is far easier than solving them! A simple year-end routine can help you head off small issues before they grow into major problems.

For Individual Taxpayers:

Review Income and Tax Documents You can’t file accurately if your information isn’t correct. Take a moment to ensure that your W-2s, 1099s, and other income statements are in order. If you spot discrepancies, reach out to your employer or payers now—it’s much easier to fix errors before tax season begins. Don’t overlook side income from investments, gigs, or rental properties. Forgetting to report these can lead to unwanted notices from the IRS. Be especially thorough accounting for income and expenses from “gig” companies like Uber Eats, GrubHub, etc. Make certain you get a Form 1099 and that it’s accurate. Account for expenses like mileage and keep the documentation. You can learn more about record-keeping for gig work here.
Catch Up on Estimated Tax Payments If you’re self-employed or earn income outside traditional employment, make sure your estimated taxes are up to date. The final payment for this year is due in January, but why wait? Use the IRS Form 1040-ES worksheet to fine-tune your numbers and avoid surprises. Falling short on these payments can mean costly penalties later.
Address Past Due or Unfiled Tax Returns Unfiled returns are a ticking time bomb. They not only accrue penalties and interest but can also invite enforcement actions like liens or levies. Even if you can’t pay the full amount owed, file the returns—you’ll at least stop the clock on failure-to-file penalties. Explore installment agreements, hardship status (“Currently Noncollectible”) or Offers in Compromise if paying off your tax debt feels impossible. It’s better to take care of unfiled returns and back taxes due before the IRS comes knocking. Once an IRS employee has been assigned to your case, it often becomes more difficult to settle on advantageous terms.
Organize Deductions and Credits Maximizing deductions and credits is the simplest way to lower your tax bill. Year-end contributions to charities or retirement accounts can make a big difference. Keep receipts for medical expenses, property taxes, or educational costs. If you qualify for credits like the Earned Income Tax Credit or Child Tax Credit, ensure you have the necessary documentation to back up your claims.
Plan for Major Life Changes Did you get married, divorced, or have a baby this year? Each of these events can significantly impact your tax situation. Update your filing status and adjust your withholdings to avoid surprises. The IRS Tax Withholding Estimator is a great tool to help you recalibrate for the year ahead.
Address Tax Shortfalls While it’s not a good idea to let the government “borrow” your money interest-free (which is what happens when you have excess withholding), you also don’t want to owe so much that you get hit with a failure to pay penalty. It’s important to avoid IRS penalties – the obvious reason is that you don’t want to get penalized. Another reason is that the IRS has a penalty forgiveness program called “First Time Abatement” where the IRS can forgive certain penalties. You may qualify if you have been penalty-free for three years. But even a small penalty in a prior year can disqualify a taxpayer from the First Time Abatement program. Making certain that you have adequate withholding or estimated payments can keep this important penalty forgiveness program available to you.

For Small Business Owners:

Reconcile Books and Financial Statements Accurate records are the backbone of a stress-free tax season. Reconcile your bank accounts and credit card statements, and ensure every transaction is correctly categorized. If bookkeeping isn’t your strong suit, now is the time to lean on accounting software or hire a professional. Errors in your books can quickly escalate into audit triggers.
Check Payroll Tax Compliance Payroll taxes are a common pain point for small businesses. Verify that all taxes for the year have been paid and that filings (Forms 941, W-2, W-3) are up to date. Misclassifying workers as independent contractors instead of employees can lead to penalties, so double-check your classifications.
Review Deductible Business Expenses Year-end purchases can be strategic. Examine your investments in equipment, technology, or vehicles for opportunities to take advantage of Section 179 deductions or bonus depreciation. Remember, deductible doesn’t mean unlimited—your expenses still need to meet IRS guidelines. If you’re unsure, consult a tax advisor who knows your industry.
Handle 1099 Reporting Requirements Have you paid any independent contractors $600 or more this year? If so, you’ll need to issue them Form 1099-NEC by January 31. Review your vendor payments carefully to ensure you’re not missing anyone. Electronic filing is a quick and efficient way to meet this requirement.
Resolve Back Taxes or Unfiled Returns Unpaid payroll taxes or unfiled corporate returns can escalate into serious problems. Address them now to avoid enforcement actions like liens or levies. If cash flow is tight, a tax professional can help negotiate a payment plan or explore resolution programs.
Plan for Next Year’s Estimated Tax Payments Use this year’s profits as a guide for next year’s estimated tax payments. Staying ahead of deadlines can help you avoid penalties. If your business experiences seasonal fluctuations, build those into your cash flow projections to ensure you can meet obligations year-round.

General Year-End Tax Tips:

Pre-Audit Your Records Having complete documentation for income, expenses, and deductions isn’t just good practice; it’s essential if you ever face an audit. Keep both physical and digital backups of key documents like receipts and invoices.
Preserve Your Bank Records Banks keep most records on a five year retention period and typically keep statements for up to seven years. However, the online pdfs and spreadsheet files are typically only available for 18 months. Download your records and safely back them up online. This gives you control over your own records for as long as you need them.
Understand IRS Resolution Alternatives If you’re behind on taxes, the IRS will likely send you a demand for payment. However, there are several alternatives available like installment agreements, non-collectible status, or settlements (Offers in Compromise) to help you get back on track. Eligibility requirements can be complex, but a tax professional can guide you through the process and ensure you’re taking full advantage of the program with all of your rights intact.
Prevent Future Problems Prevention is always better than resolution. A little effort to reconcile records, catch up on payments, and organize documents now can save significant stress and money later.

Final Thoughts:

The end of the year is your chance to reset and plan ahead. Taking these simple steps now can prevent tax issues from piling up and keep you focused on what matters most in the new year.

If you’re already facing IRS challenges, don’t wait for the problem to worsen. I specialize in helping clients resolve IRS collection and audit matters and every week I see the fallout from taxpayers failing to quickly take charge of tax problems. My goal is to help you clear past issues so you can move forward confidently.

Start the new year right by taking control of your tax situation today. A little effort now goes a long way in preventing future problems.

Disclaimer

The content on this blog is for informational and educational purposes only and should not be considered as specific tax, legal, or financial advice. Tax matters are highly individualized and depend on various factors unique to each situation. While we strive to provide accurate and timely information, it is essential to remember that the tax code is complex and constantly changing. Before making any decisions or taking action based on the information provided here, please consult with a qualified tax professional who can analyze your specific circumstances and offer tailored advice. The author and publisher disclaim any liability for actions taken based on the content of this blog without seeking professional guidance.