IRS Penalties: What You Need to Know

Time and time again, I see taxpayers incur needless costs in the form of IRS penalties. With just a little bit of knowledge regarding penalties, significant dollars can be saved. These are the most common areas of wasted dollars that I see:

  • In the case of both income tax and payroll tax returns, penalties are imposed for both failure to pay and failure to file, with the more significant penalty by far being the failure to file penalty. The failure to file penalty is 5% per month, while the failure to pay penalty is ½ of 1% per month. So, don’t be afraid to file the return, even if payment can’t be made at that time. It will save you significant dollars.
  • For both S corporation and partnership returns, the penalty for failure to file can be significant, depending on the number of months the return is late and the number of partners or shareholders the entity has. Currently, the penalty is $195 per partner/shareholder per month. So, if a return is filed six months late and the entity has 10 partners or shareholders, the penalty will total a whopping $11,700. Even in the case of an S corporation with one owner, the penalty for a return filed six months late will total $1,170. There are at least two potential saviors in the case of a late filed S corporation or partnership return.

The first one is that if it is the first time the S corporation or partnership has filed a late return, the IRS will generally waive the penalty, upon request.

Second, there is a reasonable cause safe harbor for certain small partnerships, where the failure to file penalty can be waived for reasonable cause, if certain requirements are met. The partnership must have 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) and each of whom has fully reported their partnership income, deductions, etc. in a timely filed income tax return. Again, if this safe harbor is met, the penalty will only be waived upon request.

In summary:
File your income tax or payroll tax returns, even if you or your company cannot pay as of the due date.

If a penalty is imposed, don’t immediately pay it. Take the time to consult with your CPA, and determine if it might be possible to have the penalty waived by the IRS. At the very least, it is worth a call to the IRS to request a waiver.

Pricing for Profit

Several years ago, we acquired a new client, who had only been in  business for approximately six months, but who was giddy with excitement over the success the company was having in acquiring new business.

One of the first things we did for the client was to determine where he should be pricing his product, based on his cost structure and projected sales volume.

Very quickly, it became apparent why he was achieving such “success”. Based on industry hearsay and experience, without taking the minimal time necessary to put pencil to paper, he was pricing his product such that he was not covering costs, much less returning a profit.

This is a mistake that I run into more often than one would expect, that is, small business clients who are pricing their product based on what they believe are industry rules of thumb, or pricing formulas used at a prior employer.

It is imperative that a business develop its product pricing based on its own cost structure. While at the end of the day, the maximum price for your product will be set at what the market will bear, the exercise of costing your product or service will usually be eye-opening in terms of your true overhead costs, will give you valuable insight into those key cost areas that will need to be managed and controlled in order to achieve success, and
will give you the knowledge to confidently make business pricing and cost/spend decisions based on the effect it will have on your bottom line.

A CPA’s Perspective on Market Focus

As I think back over the last several years to those clients who have successfully weathered the storm, the most successful one’s are those who know exactly who their market is, and know exactly how they are going to go about reaching this market and acquiring work. On the flip side, the clients who have struggled are those that do not hone in on a particular market, and have spent marketing dollars and effort on a smattering of different market options, with no particular focus.

For small business owners, every dollar and every hour of effort counts. Small business owners do not have the luxury of throwing dollars and hours of effort in various marketing directions in the hope that some of it yields results.

Bigger companies hold top management retreats and develop sophisticated business plans to determine their markets and the business development efforts they are going to use. The clients I refer to above developed their business plans (although I would guess they’re not aware they have a “plan”) based on the school of hard knocks or intuitive knowledge. Then, just as importantly, they have the discipline to focus all their efforts toward the market and development efforts they have chosen.

So, as a small business owner, ask yourself the following questions:

  • Over the last year, who are the clients, projects, etc. we’ve served who have really fit us, and what characteristics do they have in common?
  • How did we acquire these clients or how they find us, and did we do anything special to “win” the work?

Answer the above questions, then spend all your dollars and effort in 2012 in acquiring this same type of client, using the same marketing method.