Every year, right around the beginning of April, many people ask: “What happens if you file taxes late?”
Filing your taxes after the deadline can bring serious consequences, including monetary penalties and the increased risk of an audit.
If you’re worried you can’t make the deadline this year, don’t panic. In this article, we’ll outline the penalties and steps you can take to avoid or reduce them.
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Penalties can add up quickly if you file or pay late. Reach out to Indinero’s business tax services team, and we’ll help you avoid penalties and get back on track.
Most people think of April 15th as tax day, and indeed for individuals, that’s when traditional tax returns are due. But business owners must keep two dates in mind:
- Individuals and C corporations: April 15th
- Partnerships, multi-member LLCs, and S corps: March 15th
Tax Extension Deadline
To file for a tax extension, you must submit your request by the date taxes are normally due.
How to File a Tax Extension
If you have to file taxes late, the best course of action is to file for an extension before the due date. If you manage to do that, you’ll automatically be approved.
Each of these forms can be electronically filed on the IRS website here.
What Is the Penalty for Filing Taxes Late?
The penalties for filing late are as complicated as the US tax system. We’ve outlined some of what is likely to happen below, but individual circumstances will vary. The best bet is to file on time whenever possible!
|Note: The section below does not apply to individuals owed a refund. For more information on tax penalties for individuals, review this page from the IRS.
Let’s begin with a general outline of penalties. These apply to individuals and entrepreneurs organized under “pass-through” entities where profit flows through as regular income tax. Different rules apply to S corps, C corps, multi-member LLCs, and partnerships; we’ll detail those below. For more information on the different types of businesses, check out our article on how to choose your small business entity.
It may seem odd that both the failure-to-file and failure-to-pay penalties are calculated based on a percent of unpaid taxes. But they’re separated into two categories because the IRS wants you to communicate with them by filing a return, regardless of whether you can pay at that time.
1. Failure-to-File Penalty: The penalty for filing your return after the due date.
- 5% of the unpaid tax per month, capping at 25%.
- If filed over 60 days late, the minimum is either 100% of the unpaid tax or a flat rate (whichever is lower). The 2024 flat fee is $485. If your return is from a prior year, see IRS documentation for historical rates.
2. Failure-to-Pay Penalty: This penalty occurs when you don’t pay your tax on time. It is separate from the failure to file penalty and applies to quarterly filing requirements as well as year-end taxes.
- 0.5% of the tax owed after the due date, per month, up to 25%.
- Ten days after you’re issued a final notice of intent to levy or seize property, the rate becomes 1% per month. This occurs after considerable communication from the IRS and only for the most substantial underpayments.
- If you’ve negotiated an installment plan with the IRS, the rate is 0.25% per month.
3. Failing to File and Failing to Pay: If you incur both penalties, they accumulate differently than if only one penalty is applied.
- The late filing penalty accrues at 4.5% per month, capping at 22.5%.
- Rules for the failure-to-pay penalty are unchanged.
- Combined, the cap is 47.5%.
4. Interest Payments: The IRS charges interest on the unpaid tax due, compounded daily.
- For taxpayers other than corporations, the interest rate is the federal short-term rate plus 3%.
- The short-term rate is determined every three months.
- Failure-to-file interest begins on the due date of the return.
- Failure-to-pay interest begins on the date of notice and demand but isn’t charged if paid within 21 calendar days of the notice (or within ten business days on bills larger than $100,000).
Partnership Late Filing Penalty
Partners still file individual income taxes; the above rules apply to their business taxes. But there are a few more requirements to bear in mind. Each member must file a schedule K-1, which reports their share of distributions from the partnership. Additionally, the entity files a form 1065, aggregating the K-1 of each member into a single document.
Failure to file these documents on time will incur additional tax penalties:
- For each K-1 filed late or inaccurately, a $290 penalty applies.
- Failing to file a timely 1065 carries a penalty of $220 per month per member, up to a maximum of 12 months. For example, if you filed three months late and your LLC has three members, you’ll pay a total penalty of $1,980.
LLC Late-Filing Penalty
Since single-member LLCs are pass-through entities, the IRS doesn’t consider them unique from their operators. The rules for pass-through entities are the same as those for individuals (detailed above).
Multi-member LLCs are considered partnerships. See the above section for details on how to file in those cases.
S Corp Late Filing Penalty
S corps are considered pass-through entities; all shareholders must pay individual income tax, and associated penalties apply.
Additionally, each member files a K-1 informational return, and the S corp files form 1120S, aggregating the K-1s into a single document.
The associated penalties are the same as for partnerships and multi-member LLCs:
- For each K-1 filed late or inaccurately, a $290 penalty applies.
- Failing to file a timely 1065 carries a penalty of $220 per month per member, up to a maximum of 12 months.
Late Filing Penalty for C Corp
The late filing penalty for a C corp is the same as for an individual: 5% of the unpaid tax, per month, up to 25%.
Remember that the corporation is a separate legal entity from its shareholders. In other words, it can pay this penalty irrespective of shareholder tax returns.
What Should I Do If I Have to File My Taxes Late?
You may be asking, ‘When are taxes due?’ Of course, it’s best to file on time, but sometimes there’s no other option.
Since the failure-to-file penalty is the fastest to accrue, you should file for an extension to avoid these fees. We’ve detailed how and when above.
Here are some other steps you can take to mitigate penalties for filing late:
- If you can’t pay by the deadline, apply for a payment plan with the IRS here. This will reduce the failure-to-pay penalty.
- Sometimes, the IRS will waive penalties if you can show reasonable cause for filing or paying late. You can make this request by phone or by formally submitting form 843.
- If you disagree with a penalty, you can dispute it. Call the IRS using the number on your penalty letter or write them directly with supporting documents explaining why they should reconsider it.
- You may be eligible for a first-time abatement if you’re in good standing and have never been penalized. Call the IRS directly or file a form 843 to request this relief.
- If your request for first-time abatement or attempt to demonstrate reasonable cause is denied, you can request an appeal within 30 days of your rejection notice.
- Finally, if you have a significant tax bill, the IRS has a process called “offer in compromise,” where taxpayers can potentially settle outstanding taxes for less than the amount owed. Seek help from a tax advocate professional to pursue this route.
FAQ About Late Filing Taxes
As the tax deadline approaches, strive to file on time, but if you cannot be sure to secure your automatically approved extension, consider the strategies we’ve presented to reduce your penalties.
If you need personal assistance, indinero’s business tax services team is here to help.