Preparing taxes can cause many sleepless nights for small business owners. Most think filing their taxes late is the most common IRS penalty but there are nearly 150 additional penalties in the Internal Revenue Code that can cost business owners. Read on as Maggi Tax explains the four of the most common individual and business tax penalties and how to avoid them in the future.
- Failure to file tax penalty
It seems like the tax deadline always sneaks up on everyone. To avoid this penalty, make sure your returns are filed before the due date or request an extension by the deadline. An extension gives taxpayers an additional six months to file their returns. If you were unable to do either of those options, the IRS charges a failure to file penalty of 5% of the unpaid tax per month (capped at 25%). After 60 days, the minimum penalty amount is $435 or 100% of the tax due, whichever is less. If you’re unable to pay the amount due, we highly recommend submitting a partial payment with your tax return to lessen future penalties.
- Underpayment of estimated taxes penalty
As stated above, it’s always best to pay taxes in full by the April filing deadline but if that is impossible, submitting a partial payment, preferably in equal installments, shows commitment. If you cannot pay at least 90% of your current year’s tax bill, the IRS will assess a penalty to pay the remaining balance. Generally, the IRS failure to pay penalty is 0.5% of the remaining tax balance per month.
- Accuracy penalty
Submitting an accurate and complete tax return is critical to avoid IRS penalties. Though, sometimes non-deliberate mistakes are made when filing and can still be penalized. The two most common are a substantial understatement of income tax and negligence of the regulations. These mistakes can cost the taxpayer 20% of the underpayment and are charged after an audit.
- Tax fraud penalty
This is perhaps the IRS’s harshest civil tax penalty. If it’s determined that taxes were filed with the intent to commit fraud or that incomes were underreported, a 75% tax fraud penalty will be charged on the underpayment amount. This is assessed after an audit and no criminal investigation is needed. Criminal tax fraud is handled by IRS Special Agents and can include felony charges, exorbitant fines, and prison time.
Small business owners know that the complexity of reporting tax can be overwhelming. The best way to avoid IRS tax penalties is by working with trusted tax professionals. The Maggi Tax team is ready to help. Contact us here or call (727) 799-1701 to schedule your appointment today.