Does your small business CPA know how to help you avoid one of the biggest IRS tax penalties?
When is a tax return considered late by the IRS?
What are three terrible things that can happen when you file your tax return late?
Read on to learn the answers to these questions and more.
What’s Late?
You can extend your tax return and file during the period of extension; that’s not a late-filed return.
You only have a few days to file your income taxes this year; you will not pay any late penalties if you file by:
- September 15 for partnerships and S-corporations
- October 15 for individuals, sole proprietorships, C-corporations, and LLCs taxed as disregarded entities.
A late-filed return is filed after the last extension expired.
That’s what causes the three terrible things to happen:
#1: Chances of an IRS audit increase significantly, perhaps to 50 percent or higher.
The IRS notices that you filed late or not at all.
Of course, the “I didn’t file at all” people receive the IRS’s “come on down and bring your tax records” letter. In general, the meeting with the IRS about non-filed tax returns does not go well.
For the late filers, the big problem is exposure to an IRS audit. Say you’re in the group that the IRS audits about 3 percent of the time, but you file your tax return late. Your chances of an IRS audit increase significantly, perhaps to 50 percent or higher.
Terrible thing 1 is this: file late and increase your odds of saying: “Hello, IRS Auditor.”
#2: 25% of the Tax Due Penalty.
You trigger the significant 5 percent a month when you file late, not to exceed 25 percent of the tax-due penalty. This is something your small business CPA should know.
Here, the bad news is 5 percent a month. The good news (if you want to call it that) is this penalty maxes out at 25 percent.
#3: 47.5%= Not Filing and Not Paying Penalty.
Of course, if you owe the “failure to file” penalty, you likely also owe the penalty for “failure to pay.” The failure-to-pay penalty equals 0.5 percent a month, not to exceed 25 percent of the tax due. Does your small business CPA know this? We do.
The penalty for failure to pay offsets the penalty for failure to file such that the 5 percent is the maximum penalty during the first five months when both penalties apply.
But once those five months are over, the penalty for failure to pay continues to apply. Thus, you can owe 47.5 percent of the tax due by not filing and not paying (25 percent plus 0.5 percent for the additional 45 months it takes to get to the maximum failure-to-pay penalty of 25 percent).
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