The IRS (Internal Revenue Service) imposes various tax penalties on businesses for non-compliance with tax laws and regulations. It’s important for businesses to be aware of these penalties to avoid costly consequences. We’ve compiled a list of the eight most common penalties but it’s important to consult with a professional on your specific circumstance to determine your business’s requirements.
Failure to File Penalty
This penalty is assessed when a business doesn’t file its tax return by the deadline. The penalty is typically 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%.
Failure to Pay Penalty
If a business doesn’t pay its tax liability by the due date, it may be subject to a penalty. The penalty is generally 0.5% of the unpaid taxes for each month the payment is late. This is why we always suggest making a payment with your tax extension if you think you may owe. An extension allows more time to file, not to pay.
Accuracy-Related Penalty
Businesses may be penalized if there are inaccuracies or understatements of income on their tax return. The penalty can be up to 20% of the understated tax amount. Even if you don’t mean to! We see this a lot when a taxpayer forgets a W-2 or a 1099-R. If it’s a substantial amount of income, the IRS will assess this.
Underpayment Penalty (Estimated Tax Penalty)
Taxpayers are required to make estimated tax payments throughout the year if they expect to owe a certain amount of taxes. This is generally, if you expect to owe $1,000 or more. Underpayment penalties apply if these estimated payments are not made timely (4/15, 6/15, 9/15 and 1/15). The amount of the penalty varies based on the underpayment and interest rates.
Employment Tax Penalties
Failure to withhold and pay employment taxes (such as Social Security and Medicare taxes) for employees can result in substantial penalties. These penalties can be assessed on the business and responsible individuals, including officers or owners. The IRS does NOT play when it comes to payroll taxes (and we don’t either). These penalties can be extreme because you have actually withheld the tax from the employees and not paid it to the IRS. They don’t like that. They refer to these as Trust Fund Penalties.
Failure to Deposit Penalties
Businesses must deposit certain federal payroll taxes in a timely manner. The timing of your required payment will depend on the aggregate for the year (they mail you a letter each December telling you what it is). Failing to make these deposits on time can result in penalties that vary based on the amount and duration of the delay. We recommend getting in the habit of remitting the payroll taxes the same day the paycheck is issued.
Late Filing of Information Returns
Businesses that are required to file information returns, such as W-2s for employees or 1099s for contractors, can face penalties for failing to file these forms on time. You’re looking at up to $530 per form.
Final Thoughts
It’s important for businesses to stay informed about their tax obligations, meet filing deadlines, and ensure accurate reporting to avoid these IRS tax penalties. Additionally, seeking professional tax advice or consulting with a tax expert can help businesses navigate complex tax laws and regulations and minimize the risk of incurring these penalties.
Keep in mind that tax laws and regulations can change, so it’s essential to stay up-to-date with the latest IRS guidelines.
At Aligned CPA, our clients don’t have to worry with following updates and owning the responsibility of ensuring IRS deadlines are being met. We take the stress and worry out of the equation while keeping you informed.
Do what you love and we’ll support you by doing what we love.
Joy Lutz, CPA, CTP
As the founder of Aligned CPA, Joy has built a firm that is your strategic financial partner. With a growth centric approach, we build meaningful relationships with our clients because we value their success as much as our own.
Positioning ourselves as the tax and financial strategists for your business, we help you make empowered, financial-based business decisions that lead to long term success.