8 Tax PenaltiesYour Business Should Know About
Most business owners are well acquainted with tax penalties - they’re harder to avoid than anyone wants to admit. But what are tax-related penalties? The majority of penalties taxpayers come across are issued by the IRS. Here’s a list of the most common tax-related penalties and their amounts:
Information Return: applies to taxpayers who don’t file or provide required information on their return or payee statement (like a 1099) correctly by the tax due date. Information return penalties can be up to $3000.
Failure to File: applies when you don’t file your tax return by the due date. The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. These penalties won't exceed 25% of your unpaid taxes.
Failure to Pay: applies when you don’t pay the tax you owe by the due date. The Failure to Pay Penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. These penalties won’t exceed 25% of your unpaid taxes.
Accuracy-Related: applies when you don’t claim all your income, or when you claim deductions or credits for which you don’t qualify. For example, if you claim a child you don’t have as a deduction. (Don’t do that.) In cases of negligence or disregard of the rules or regulations, the Accuracy-Related Penalty is up to 20% of the correctly calculated tax amount. In cases of substantial understatement (like you claimed $10,000 in business expenses for a business you didn’t have), the penalty is 20% of the correctly calculated tax amount.
Failure to Deposit: applies when you don’t pay employment taxes accurately or on time. This is one of the hardest penalties to deal with, so it’s at the top of the list of penalties we recommend you avoid like the plague. The penalty is up to 15% of the unpaid tax.
Dishonored Checks: applies when your bank doesn’t honor your check or other forms of payment. Also known as a bounced check. (Don’t do this, either.) The penalty is 2% of the amount of the check.
Underpayment of Estimated Tax by Corporations: applies when you don’t pay estimated tax accurately or on time for a corporation. If your corporation doesn’t pay enough estimated tax, the penalty is 10% of the amount you should have paid. If you don’t pay any estimated tax, the penalty is 25% of the amount you should have paid. For a corporation, that can mean a huge penalty.
Underpayment of Estimated Tax by Individuals: applies when you don’t pay estimated tax accurately or on time as an individual. The penalty here is very dependent on the individual and the amount owed. We can’t give you specific numbers here, but the IRS says “The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year or both.” (So really, really don’t do that.)
Make sure you pay your taxes on time, in full, and with all of the required information. File accurate returns, pay your tax owed by the due date, and provide any information returns by the deadline. Contact us today to learn more about how we can help with your business's tax needs, save money, and headaches.
