If your small business faces a tax penalty for filing business taxes late, this article is for you.
Here’s what you’ll learn:
- How late filing & tax payment penalties can tank your business
- Which 3 IRS programs offer penalty relief
- Offsetting penalties with aggressive deductions and credits
I cannot stress this enough: your business must act immediately to prevent further penalties.
Penalties For Late Filing & Late Payment
Federal Penalties start the day after the return is due. The Internal Revenue Service (IRS) imposes two forms of penalties for business owners and the self-employed.
Failure to File Penalties
If your business does not file for an extension by April 18 (or fails to file by the extended deadline of October 17), you will face penalties immediately.
For each month or part of a month your tax return is not filed, the IRS imposes a monetary penalty equal to 5% of the unpaid taxes. Penalties end at five months at 25% of your business’ unpaid taxes.
- Month 1 – 5% of tax liability
- Month 2 – 5% of tax liability
- Month 3 – 5% of tax liability
- Month 4 – 5% of tax liability
- Month 5 – 5% of tax liability
After 60 days, small businesses must pay a minimum penalty of $435 or 100% of their tax liability. The government takes whichever sum is less.
For each month your business fails to pay its taxes in full, the IRS imposes a penalty of 0.5% of the company’s total tax liability.
Penalties continue each month but won’t exceed 25% of the business’ unpaid taxes.
What’s the Maximum Penalty?
What happens if you file your business taxes late? A better question is, “How late?”
Wait long enough, and penalties will reach a maximum of 25% of your unpaid taxes. An extra 25% in tax liability is a nightmare for any business.
For Penalties, Know When To Call a Professional
Accounting issues, missing documentation, and overall uncertainty are the technical and human problems that a Certified Professional Accountant (CPA) trains to resolve.
When we start seeing numbers like 25%, we believe it’s time to get a professional involved.
3 Opportunities To Minimize Late Filing & Payment
The IRS runs three programs aimed at penalty relief or payment plans associated with the “Failure to Pay” penalty mentioned above.
- Penalty Relief Due to Reasonable Cause
- Penalty Relief Due to First Time Penalty Abatement
- Business Payment Plans
These programs are not likely to affect the average penalty for filing business taxes late. But there’s always a chance.
Here’s an overview of each program.
1. Penalty Relief Due to Reasonable Cause
The IRS allows for penalty relief due to reasonable cause. “Reasonable cause” refers to an unforeseen event that caused a business or individual to fail to meet their tax obligations.
Here are examples of reasonable cause from the IRS:
- Inability to obtain records
- Fire, casualty, natural disaster, or other disturbances
- Death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- Another event that shows your business used all ordinary business care to meet your tax obligations but could not do so
It seems simple, right? Not really.
In fact, a reasonable cause claim requires two kinds of proof: records and documents and a taxpayer’s written responses to detailed questions.
Reasonable cause is possible, but you’d better be sure you have precisely what the IRS wants to see.
2. First-Time Penalty Abatement
The IRS offers penalty abatement for businesses with a demonstrated record of filing and paying on time.
To be eligible for a first-time penalty abatement, a small business must satisfy all three requirements:
- Have not previously had to file a return or had no penalties for three years before the year it was penalized
- Has filed all required returns or filed an extension
- Has paid, or arranged to pay, any tax due
There’s no guarantee that the IRS will see things your way. However, abatements are there to be used. If you believe that your business qualifies, consider speaking with an accountant or a CPA.
3. IRS Business Payment Plans: Pay Monthly
Don’t let a cash shortfall prevent you from paying your business taxes. Payment in full should be your top priority. If, however, that’s not possible, you could be eligible to pay off your tax bill monthly with the IRS’s Business Payment Plan.
If you owe a total of $25,000 or less in taxes, penalties, and interest, you can even apply for a payment plan right now online.
Taking this short description at face value would be a mistake. It is complex and labor-intensive. Assess as best you can whether your business might be eligible. If you’re convinced, bring your findings to a CPA.
Your Best Option? Offset Penalties With Savings
The best way to reclaim money lost from penalties is to save more money on taxes with deductions and credits.
The process is simple. We amend your tax return to include new deductions and credits, then file it immediately to halt further penalties. Less tax liability means more money to offset your penalties.
So if you’re waiting to file a return and haven’t paid your business tax bill, let us help. We’ve all had wake-up calls. Some are so costly we have to listen.
Call me: (682) 224-3243
Jeremy A. Johnson, CPA
About Our Firm
Jeremy A. Johnson, CPA, P.C. is a trusted Fort Worth-based CPA firm. We help small businesses grow with reliable accounting, tax planning, tax preparation, and tax filing services.
Schedule a Consultation today for assistance.