There are an infinite number of reasons why a business may not be able to file their taxes on time. Between demo days, investor meetings, and late-night team strategy sessions, the bookkeeping and tax prep for an early stage company can often fall by the wayside.
With the deadlines to file and pay your 2016 business taxes behind us, the question on your mind is likely: What now?
First Steps to Take if You’ve Missed Your Business’s Tax Deadline
To move forward and get taxes filed after missing the income tax deadline, there are a few basic steps that business owners should take:
1. Start with your business entity type
C Corps, Partnerships, SMLLCs, and S Corps can all have different penalties and filing requirements, so this is an important place to start in determining your next steps. (I’ll get into the various penalties later.)
2. Close your books and get a clean set of annual financials
To file taxes, you will need a complete set of financials for the fiscal year. If you do not already have a closed set of books, this will be the major roadblock to filing.
If you haven't already, you will want to bring on a bookkeeping or accounting service that can help pull everything together and close out the year. 2018 is approaching fast, and with that, the 2017 tax-filing season. There's no pause button, so you don't want to fall behind on your taxes consistently as penalties add up.
3. Identify any foreign filing requirements
If your business has international owners or officers, conducts business with foreign entities, or holds assets in foreign accounts, you may be required to file certain foreign forms. The IRS charges tens of thousands of dollars as a penalty for missing any of these foreign filings. In this article, we dive more into identifying different foreign activities, and as always, we recommend speaking with your tax advisor to understand your business’s requirements.
If you missed a foreign filing requirement last year, you may want to look into hiring a tax expert who can help write an abatement letter to the IRS. These penalties are incredibly serious and expensive and should be dealt with as quickly as possible.
Different Penalties for Different Entities
Once you know your entity type, have closed your yearly books, and examined any foreign filing requirements, you should be ready to file your taxes. However, there may be penalties and interest payments due with your return.
The IRS typically enforces four types of consequences for late tax filings or payments
1. Late Filing Penalties: This is the penalty for filing your tax returns after the due date, including extensions. Tax authorities may assess these penalties regardless of the tax owed on your return.
2. Underpayment of Estimated Tax Penalties: These penalties occur when you do not pay your taxes on time. According to the IRS, you must pay taxes as you earn or receive income during the year, via either withholding or estimated tax payments. If you don’t properly withhold or make estimated payments through the year, you may owe underpayment penalties when you file your return.
3. Late Payment Penalty: In addition to the underpayment penalty, the IRS may assess a late payment penalty on any tax liability left unpaid on the tax return after the due date of the return, not including extensions.
4. Interest Payments: On top of the three other penalties, the IRS will add interest on the unpaid tax due, which accumulate the longer they remaining outstanding.
The actual amount due for each penalty varies based on the entity type and overall tax liability
Partnerships are penalized $195 for a maximum of twelve months, multiplied by the total number of members (source). For example, if your partnership files four months late, and you have five members, you will multiply $195 by four, and then by five to get the total penalty of $3,900.
Similarly, S Corps are penalized $195 for each month the return is late for a maximum of twelve months, multiplied by the number of shareholders in the business. For example, if your S Corp files four months late, and you have five members, you will multiply $195 by four months, and five members to get the total penalty of $3,900.
The One Tax Responsibility Every Partnership and S Corp Must Handle On Time: Schedule K-1s
Partnership and S Corp business tax returns will include a Schedule K-1 for each partner or shareholder, which must be provided to each partner or shareholder when due. The penalty for failing to provide the Schedule K-1 to each partner is $260 for each K-1.
For C Corps, the IRS late filing penalty is equal to five percent of the unpaid tax amount for each month or portion of a month the taxes remain unpaid, up to a maximum of 25% of the unpaid tax. For example, if the corporation's tax liability is $4,000 and you are filing three months late, take 5% of $4,000 (0.05 x 4,000) multiplied by three months to get your late filing penalty of $600. Additionally, the IRS late payment penalty for C Corps is 1/2 of 1% of the unpaid tax for each month the tax is not paid, up to 25% of the unpaid tax.
Now that the deadline has passed, it is more important than ever to get a handle on your 2016 financials and complete your tax filings, in order to prevent further penalties on your business. With penalties and interest adding up every day, it’s important to file as soon as you can.
This may be the time where it makes sense to bring in an outside accounting and tax solution, who can help you sort through your prior year financials and prepare your taxes. There are some big advantages of having a professional help prepare your tax return, including:
1. An accountant can provide insight into tax strategy, so you can position yourself with the lowest tax liability possible (which could mean lower penalties and interest as well).
2. A CPA can assist you in corresponding appropriately and strategically with the taxing authorities if you receive a notice.
3. Additionally, a CPA or tax attorney will be incredibly helpful in abating any penalties with the IRS. Once you file the return, it can take the IRS up to six months to send you a penalty notice. It is at the time when that notice is received that you may need a CPA to write what is known as an “abatement letter” requesting those penalties get waived, or reduced.
Even if you did not hire a CPA prior to filing your tax returns, it is a good idea to have one take a look at any IRS penalty notices to ensure you’re responding correctly and effectively. The abatement process is typically pretty tough for individuals to navigate, as it requires writing letters, calling the IRS, and coming to a resolution with an IRS agent.
Cover photo courtesy of Evan on Flickr CC.