Updated: Oct 20
When taxpayers don't meet their tax obligations the IRS charges penalties. The reasons range from not filing on time to not providing accurate information. Penalties can range from a few hundred dollars to thousands of dollars. Creating extra taxes for you to pay that you could have avoided.
Let's take a look at some of the reasons the IRS charges a penalty and 5 penalties you should avoid in your business.
Why does the IRS charge penalties?
How do I know how much the tax penalty is?
The IRS will send you a notice or letter by mail informing you of your balance. They will show you how much of it is the initial tax assessed, penalties, and interest. The letter will also let you know the reason for the penalty and what to do next.
You should confirm that the information on your notice is correct before paying. You can do this by pulling your account transcript to confirm filing and payment dates. If everything is correct you may be eligible for first-time abatement or reasonable cause abatement.
5 common IRS penalties business owners get charged
You can avoid IRS penalties but sometimes what you don't know hurts you. Below are 5 penalties that business owners get hit with that cause a big financial blow to their business. Making it seem impossible to focus on and grow your business.
# 1 - Failure to file penalty
The IRS assesses this penalty when you do not file your tax return on time. This applies to your personal return as well as business returns. This includes the 1120 (corporation), 1120-S (s-corporation), 1065 (partnership), and 990 (non-profit) returns. The penalty for filing your 1040 late is 5% of the tax due for each month it is late. The maximum penalty is 25% of the tax owed. Interest is also applied to this penalty.
So let's say that you owe $10,000 and file your tax return 4 months late. The IRS will assess a failure to file penalty of $2,000 plus interest. 4 months x 5% of the tax assessed = $2,000.
The penalty for business returns is calculated differently than the 1040 assessment. You can find information on how that is calculated at IRS.gov.
#2 - Information return penalty
Information return penalties are a result of not filing required information returns on time. You have to file these returns with the IRS as well as the payee.
An example of this is Form W-2. These are typically due on January 31st. If they are 30 days late the IRS charges a penalty of $50. If you get it filed before August 1st the penalty is $110. After that time it is $290 unless the IRS decides you had intentional disregard. Then the penalty is $580.
Interest is also charged on this penalty.
# 3 - Failure to pay penalty
The IRS will charge you a failure to pay penalty if you do not pay your taxes on time. Filing a tax extension only gives you an additional 6 months to file your tax return, not pay your taxes. The IRS calculates this penalty based on how long you don't pay your tax bill. It is .5% of the unpaid taxes for each month or part of a month you don't pay your taxes. The penalty won't exceed 25% of your unpaid tax bill. Interest is also applied to this penalty.
This penalty hits a lot of new business owners that don't understand estimated tax payments. The IRS charges this penalty when you do not pay your estimated taxes correctly. This includes the amount and the correct date(s).
This IRS bases this penalty on 3 things:
the amount of the underpayment.
the period when the underpayment was due and underpaid.
the interest rate for underpayments that the IRS publishes quarterly.
#5 - Accuracy-related penalty
The accuracy-related penalty applies when you have creative accounting on your tax return. This means that you did not claim all your income or claimed deductions and credits you don't qualify to claim.
An example of this is claiming dependents on a tax return when you do not have dependents. Another common one is not claiming all income because you did not receive a 1099-NEC or other information statement reporting it to the IRS.
The penalty for an understatement is 10% of the understatement or $5,000. Whichever number is greater.
All of these penalties can be avoided in your business. It is important to surround yourself with a qualified team that can help you get things done not only correctly but in a timely manner. If you are already facing penalties all hope is not lost. You may qualify for penalty abatement. If you owe and can't pay today, look into setting up an installment agreement with the IRS. Because back taxes shouldn't ruin your life or shut down your business.
Timalyn S. Bowens EA is America's Favorite EA and Tax Expert who will work hard to find a customized legal solution for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states. As the host of Tax Relief with Timalyn Bowens and a YouTube content creator she empowers taxpayers to make educated decisions about their tax situation.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.