It is important to know how to compute IRS penalties, even for a ballpark number, so that you can make smarter decisions on filing business taxes.
Many people ask me questions like:
However, as a person who has set up many businesses in the US I believe the root of this is simply that people are worried about paying for an accountant on a business that isn't making much money, coupled with general awe and fear of the IRS.
When in doubt - File
If you have a small, start-up business, it is not going to get into any trouble from the IRS by filing its taxes on time. It may or may not get into a bit of trouble if it does not (i'll explain 'trouble' shortly, and it's actually not that bad either). If you have incorporated as a Corporation (LLC, C Corp, S Corp election etc) with an EIN I would further encourage you to file your taxes.
My first advice is pay for a CPA/EA if you can afford one, but if you cannot I would recommend purchasing a tax preparation software like TurboTax Business. This software regularly retails for $160-$200 but I have seen it on sale many times for about $50. I have used it and it does the job for basic reporting. The real advantage of a good CPA/EA is beyond the reporting, in that they can help you plan ahead, structure smartly and deduct strategically, such planning adds huge value, vs just reporting your random actions in hindsight.
Failure to File and Failure to Pay Penalties
If you don't file for your business, you can incur Failure to File and Failure to Pay penalties. They are computed on the Tax that you owe (and should have paid on time) to the IRS.
Failure to File Penalty
You should sign up for EFTPS to pay online, this is the easiest way to pay your taxes and penalties.
Don't want to Pay penalties?
Obviously, file and pay on time... but if you don't want to pay after you have filed late, there is a solution. The IRS Telephone Agents can waive Penalties, Fees and Interest owed. If you opt to pay online you waive this possibility, but if you call into the number on your IRS Penalty notice you open up the option.
Remember, it is always better to deal with a human, as they have the ability to waive fees, whereas an online payment system is only the ability to receive a payment. Be nice, be polite, and you might get lucky, I have personally had FTF, FTP and Interest reduced to zero on several businesses simply by the discretion of a kind IRS agent.
I am not a Tax Professional, this advice is simply sharing my experience with these matters, and is not a substitute for professional advice.
Many people ask me questions like:
- I have a business, but it made no profit, do I need to file taxes?
- I have a business, but it made no income, do I need to file taxes?
- I have a business, but I will not owe any taxes on it this year for sure, do I need to file taxes?
However, as a person who has set up many businesses in the US I believe the root of this is simply that people are worried about paying for an accountant on a business that isn't making much money, coupled with general awe and fear of the IRS.
When in doubt - File
If you have a small, start-up business, it is not going to get into any trouble from the IRS by filing its taxes on time. It may or may not get into a bit of trouble if it does not (i'll explain 'trouble' shortly, and it's actually not that bad either). If you have incorporated as a Corporation (LLC, C Corp, S Corp election etc) with an EIN I would further encourage you to file your taxes.
My first advice is pay for a CPA/EA if you can afford one, but if you cannot I would recommend purchasing a tax preparation software like TurboTax Business. This software regularly retails for $160-$200 but I have seen it on sale many times for about $50. I have used it and it does the job for basic reporting. The real advantage of a good CPA/EA is beyond the reporting, in that they can help you plan ahead, structure smartly and deduct strategically, such planning adds huge value, vs just reporting your random actions in hindsight.
Failure to File and Failure to Pay Penalties
If you don't file for your business, you can incur Failure to File and Failure to Pay penalties. They are computed on the Tax that you owe (and should have paid on time) to the IRS.
Failure to File Penalty
- Failure to File 5% of tax owed per month, up to 25% of tax owed. If you file more than 60 days late your minimum penalty will be the smaller of $135 or 100% of your taxes owed.
- Failure to Pay Penalty 0.5% of tax owed per month, up to 25% of tax owed.
Example:
If you have a $1000 FTF penalty and a $100 FTP penalty the calculation would be:
($1000-$100) + $100 Total Penalty, $1000
Interest on owed TaxesIf you have a $1000 FTF penalty and a $100 FTP penalty the calculation would be:
($1000-$100) + $100 Total Penalty, $1000
- The IRS will charge you interest on taxes owed, the current 2014 rate is 3% APR of the amount owed, compounded daily
- One thing that is worth mentioning is that if you don't file when you would be due a refund you have only 3 years to file and claim that refund else it will be lost, per IRS Topic 153
- While I do advise filing taxes on time, and just sucking it up and getting it done, it is also prudent to take all steps possible to structure your entity correctly before you start filing taxes and claiming expenses on it, get it right first!
You should sign up for EFTPS to pay online, this is the easiest way to pay your taxes and penalties.
Don't want to Pay penalties?
Obviously, file and pay on time... but if you don't want to pay after you have filed late, there is a solution. The IRS Telephone Agents can waive Penalties, Fees and Interest owed. If you opt to pay online you waive this possibility, but if you call into the number on your IRS Penalty notice you open up the option.
Remember, it is always better to deal with a human, as they have the ability to waive fees, whereas an online payment system is only the ability to receive a payment. Be nice, be polite, and you might get lucky, I have personally had FTF, FTP and Interest reduced to zero on several businesses simply by the discretion of a kind IRS agent.
I am not a Tax Professional, this advice is simply sharing my experience with these matters, and is not a substitute for professional advice.
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