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.

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