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What's the Penalty for Filing Taxes Late?

There are countless aspects to running a small business, from managing inventory to tracking routine office expenses. But sometimes, letting one area go too long without attention can create serious issues. If you haven't caught up on your bookkeeping, the annual income tax deadline may feel like it's approaching at lightning speed.

You can’t file your taxes without knowing your numbers, and you can’t know your numbers without updating your bookkeeping. Bookkeeping takes time and focus that can be hard to find in the busy life of a self-employed entrepreneur. It’s easy to let things get away from you a bit, but what happens then? Is there a penalty for filing taxes late?

Short answer? Yes.

When are 2022 taxes due?

The buzz about tax season starts right after the first of the year, but taxes aren’t actually due right away. Tax returns for 2022 are due April 17, 2023.

If you file an extension, your due date moves to October 16, 2023.

It’s important to note that an extension moves the income tax due date for the paperwork—not the payment you might owe. The IRS will want its tax payment from you by April, regardless of paperwork extensions.

What is the penalty for filing taxes late?

Let’s say you missed the filing date for your federal tax return. You owe the IRS money, and you’re panicking just a bit. Your first step is to relax and recalibrate a bit. Late tax filings happen, and you can easily set things to rights again. While there are ways to sort out your late filing, you can still expect consequences in the form of penalties.

There are two possible penalties in this situation: a late filing penalty and a late payment penalty.

The amount of these penalties will be determined by how much you owe the IRS and how late your tax filing is. It stands to reason that the more you owe and the later the filing, the more expensive the penalty might be.

  • The IRS penalty for not filing your tax return is 5% of the unpaid taxes for each month your taxes remain unpaid.

  • The IRS penalty for not paying your business taxes on time is 0.5% of the unpaid tax amount every month.

If both penalties apply in the same month, the maximum penalty is 5% per month, which breaks down into 0.5% for a failure-to-pay penalty and a 4.5% failure-to-file penalty.

At most, however, each of these penalties will be 25% of the total tax you owe, and it takes a while to reach that point.

  • The IRS will charge you the 5% for failure to file for five months until that total penalty reaches 25% of the unpaid tax amount.

  • The IRS will continue to charge you the 0.5% failure-to-pay minimum penalty for 45 months until it also maxes out at 25% of the unpaid total.

How you can avoid or minimize penalties

You can skip all IRS late-filing and late-payment penalties completely by filing and paying your tax balance due on time. While that’s the obvious goal, we all know sometimes life just gets in the way.

If you’re doing your best to catch up, and you just didn’t get there before the deadline, consider a few ways to minimize your tax penalties.

  • File an extension. If the April deadline hasn’t yet passed, file for a tax extension and use those extra six months to get your finances caught up and organized for filing. Remember that an extension gives you more time for filing—not payment. Payment is still due by April 18. If you’ve already missed the deadline, you no longer have the option to file for an extension.

  • File your taxes even if you can’t pay them yet. The penalty for missing federal tax filing is larger than the penalty for missing the payment. File your income tax return with the IRS and avoid the larger of the two penalties. There are many ways to sort out how to pay your taxes.

  • Get help to file as quickly as possible. If you missed the deadline, penalties are creeping up every month. File as soon as possible, even if it means paying for help from a tax professional to sort out the numbers and get your tax forms prepared. The cost of bookkeeping and working with a tax agent may be far less than the increasing penalties for leaving your business income taxes unpaid.

However, a word of warning about trying to file as quickly as possible: it’s important to file your taxes as close to the deadline as you can, but it is just as important to file your taxes correctly.

Making a mistake in your tax preparation not only can cost you more in tax payments, but mistakes on tax forms are also one of the most common IRS audit triggers. If you’re already dealing with cleaning up a late filing and payment, you sure don’t want to handle an IRS audit on top of that.

Remember that cleaning up your tax bill with the IRS and sorting out those penalties applies only at the federal level. You have still have a state tax obligation to sort out as well.

What if you can’t afford to pay what you owe?

The IRS is realistic about tax payments. They know that sometimes a tax burden is too high for a taxpayer to handle in a given year.

The IRS offers four different tax relief programs for business owners who find themselves unable to pay the full tax burden when filing.

Penalty Abatement

Penalties show up when you fail to file and pay your taxes on time. A Penalty Abatement with the IRS, however, removes the penalties based on the IRS’s estimated tax amount. To file a Penalty Abatement letter, you must be current on your tax return filing and have a demonstrable reasonable cause for the delay. This might be a death in the family, a loss of records, or a natural disaster, for example.

Tax Installment Agreement

Another option available is an installment payment plan you set up with the IRS. You get to pay your tax debt in a series of payments if the IRS agrees to the plan that you propose. While an installment plan may make paying your tax burden possible, non-payment fees will continue to accrue until the balance is paid in full.

Offer in Compromise

In some tax payment scenarios, the IRS may accept an Offer in Compromise for the amount that you owe. This is essentially a counteroffer or negotiation with the IRS. They say you owe A, and you tell them you can only afford to pay B. There are some very specific requirements you and your business must meet to be considered for an Offer in Compromise.

Currently Non-Collectible

Negotiating your tax debt as “Currently Non-Collectible” means you get an IRS-approved extension on your tax payment. This delay is approved based on your lack of ability to pay both your living expenses and your tax debt. This is not a debt-forgiveness program, however, and your taxes will be due later when your finances improve. The IRS revisits your case every tax year to check on your ability to repay.

Other payment options

If none of the IRS relief programs is the right fit for your situation, you do have other payment options. Bank loans, including personal loans or even credit cards, make it possible to pay off back taxes. Some business owners even prefer this method. They may pay taxes with a credit card for the credit card rewards, but then they pay the card’s balance off quickly to avoid interest payments.

But if you don’t have the money readily available to cover your tax payments through your business bank account or by paying off a credit card immediately, you may be looking at a steep interest rate and substantial fees. Consider using your line of credit as a final resort in this situation.

How Bench can help

Tax filing is relatively straightforward once you know the numbers you’re working with. Filling out tax forms isn’t usually what causes a delay for business owners—it’s the number-crunching that happens beforehand.

If you’ve fallen behind on your financial records and bookkeeping, Bench can help. Getting your financial records updated and correct is the first step to getting your taxes filed and avoiding additional (or any!) penalties.

The specialized historical bookkeepers at Bench will get neglected financial records up to date, and they will help you identify the tax deductions and credits you qualify for. These can reduce your overall tax burden with the IRS. You might even discover a tax refund when your records are cleaned up.

When the IRS sends you a letter with penalties and fees, they are basing their numbers on an estimate of what they think you likely owe. You may owe a lot less, but you won’t know until your books tell you the proper amount.

Want to set a payment plan or negotiate a compromise? Bench will not only help you sort out your books, but we can also refer you to our extensive network of partners who specialize in negotiations with the IRS.

Working with the IRS can be intimidating. Knowing you have a CPA or an enrolled agent working by your side can make the process much less stressful.

The bottom line

Looming deadlines can create anxiety for business owners who are already juggling responsibilities. The good news is that you have options as the tax filing deadline approaches. Focus first on cleaning up any bookkeeping so that you can file as quickly as possible and avoid fees.

Missed the deadline? It’s not the end of the world. Filing paperwork quickly can still help reduce fees, and you have options for paying the balance in a timely manner and getting right with the IRS again. Best of all, you don’t have to do it alone. We can help.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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