As per the Internal Revenue Service, the Failure to File Penalty applies if taxpayers and businesses do not file their tax return by the different due dates. This tax year, for S Corporations and Partnerships, the due dates were March 15, and September 15 for business owners who timely requested an extension to file. For Individuals, Schedule C, and Corporations, the due dates were April 17, and October 16 for taxpayers who did request a timely extension to file.

There are many cases where some business owners have not filed the correct tax return for their business. Many times, they found out years later.

It is recommended that new business owners provide a copy of their EIN(Employer Identification Number) letter to their tax preparers and inform them if there has been a change in business entity classification to avoid filing an incorrect tax form for their business.

Be advised that when two or more persons register an LLC, it is taxed as a partnership at the federal level unless the partners make an election to treat it as an S corporation. Partnerships, and S Corporation returns are far more complicated than schedule C returns (disregarded entity/self-employed), and thus, the bookkeeping and tax preparation fee are more costly. Further, the IRS has recently allocated more funds to enforce partnerships and corporations tax reporting. Many business owners alleged that they were not aware that the penalty was so severe when they did not file . As an example, for this tax year, some taxpayers who did not file their partnership or S Corporation return are already receiving tax penalty notices. Two partners owe over $3,000.00 for not filing their partnership return by March 15, 2023, because they did not request an extension to file.

Individuals/ Self Employed (Form 1040/Schedule C).

For individual taxpayers, the penalty you must pay is a percentage of the taxes you did not pay on time. Generally, the IRS sends you a notice or letter if you owe the Failure to File Penalty. According to the Internal Revenue Service, the Failure to File Penalty is based on how late you file your tax return and the amount of unpaid tax as of the original payment due date, not the extension due date. The penalty is calculated in this manner:

1.     The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes.

2.     If both a Failure to File and a Failure to Pay Penalty are applied in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.

3.     If after 5 months you still haven’t paid, the Failure to File Penalty will max out, but the Failure to Pay Penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.

4.     If your return was over 60 days late, the minimum Failure to File Penalty is $435 (for tax returns required to be filed in 2020, 2021 and 2022) or 100% of the tax required to be shown on the return, whichever is less.

5.     If your return was over 60 days late, the minimum Failure to File Penalty is $450, for tax returns required to be filed in 2023, or 100% of the tax required to be shown on the return, whichever is less.

Partnerships (Form 1065).

Every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax. For tax year 2023, the penalty is $220 for each individual who was a partner at any time during the tax year, for each month or part of a month that the return was filed late, for up to 12 months.

S Corporations (Form 1120S)

For returns due in 2023, the minimum penalty for failure to file a return that is more than 60 days late has increased to the smaller of the tax due or $450.

A penalty may be assessed if the return is filed after the due date, including extensions, or the return does not show all the information required unless each failure is due to reasonable cause. For returns on which no tax is due, the penalty is $220 for each month or part of a month (up to 12 months) the return is late or doesn’t include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax.

Failure to provide information timely.

For each failure to furnish Schedule K-1 (and Schedule K-3, if applicable) to a shareholder when due and each failure to include on Schedule K-1 (and Schedule K-3, if applicable) all the information required to be shown (or the inclusion of incorrect information), a $290 penalty may be imposed with respect to each Schedule K-1 (and Schedule K-3, if applicable) for which a failure occurs. If the requirement to report correct information is intentionally disregarded, each $290 penalty is increased to $580 or, if greater, 10% of the aggregate amount of items required to be reported.

The penalty will not be imposed if the corporation can show that not furnishing information timely was due to reasonable cause.

Corporations (Form 1120)

The minimum penalty for failure to file a return that is more than 60 days late has increased to the smaller of the tax due or $450 for returns due in 2023.

A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $450. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause.

A corporation that does not pay the tax when due may generally be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax.

Trust Fund Recovery Penalty.

This is a penalty that may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. The penalty for TFRP is more coercive than other tax penalties because the IRS considers the persons who are responsible to collect and submit those taxes collected and not submitting them as stealing from the government. Those taxes are generally reported on:

Form 720, Quarterly Federal Excise Tax Return;

Form 941, Employer’s QUARTERLY Federal Tax Return;

Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees;

Form 944, Employer’s ANNUAL Federal Tax Return; or

Form 945, Annual Return of Withheld Federal Income Tax.

The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the full amount of the unpaid trust fund tax.

The trust fund recovery penalty will not apply to any amount of trust fund taxes an employer holds back in anticipation of the credit for qualified sick and family leave wages or the employee retention credit that they are entitled to.

Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. 

  Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority. 

We offer FREE initial consultation!!!

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