According to the IRS, filing your taxes late carries a total penalty of "five percent of the unpaid taxes for each month or part of a month that a tax return is late." Even for a very small business, that fee could easily reach a few thousand dollars fairly quickly.
To help yourself avoid paying the IRS any more than you have to, keep reading to learn what you should know about filing taxes late.
3 Factors to Consider When Filing Taxes Late:
1. The Required Paperwork
The IRS website advises anyone whose return is past due to file as soon as possible and in the same way, to the same location they would normally. However, they also say, "If you have received a notice, make sure to send your past due return to the location indicated on the notice you received."
If you have several tax returns from previous years that are past due, you’ll generally need to file any missing returns from the past six years, though this requirement can vary depending on your situation.
Alternatively, if you’d like to file your taxes later than April 15th without incurring a penalty, you’ll need to file for an automatic extension using Form 7004. Keep in mind, though, that you’ll still need to estimate your tax liability and pay it by April 15th. Filing an extension only gives you the right to file without incurring a penalty so long as you make the necessary tax payment.
Finally, you’ll also need to do some research on your state’s guidelines for filing tax extensions. In some cases, your federal tax extension will apply to your state return as well, but not always.
2. How Filing Late Can Affect Your Business
As a business owner, filing your taxes late is going to cut into your bottom line. How much it affects your bottom line depends on how late you file your taxes and the amount that you owe.
As time goes on, the penalties for filing late will build up. Plus, there’s a good chance that you’ll miss out on potential deductions that you could've claimed if you had filed on time.
In more serious scenarios, the IRS can get even more punitive. It’s completely within their power to do the following:
- Place a tax lien on your business
- Seize your assets
- File criminal charges
- Compel you to forfeit your tax refund
If the IRS goes so far as to place a tax lien on your business, that means they have a legal claim to your assets which makes it extremely difficult to sell those assets.
As a result, your credit could take a major hit and it will be much harder to find a lender who’s willing to provide you with additional financing.
3. How Late Tax Filing and Payment Penalties Work
This IRS wants you to be prepared when it's time to file, so generally, the penalties for filing late are far worse than the penalties for paying your taxes late. They’ve structured it this way to encourage you to file even if you can’t pay your entire balance so that they can work out a resolution with you.
However, the way the penalties are calculated can be confusing. For late payments, the IRS will charge you interest on your unpaid balance.
As mentioned earlier, the late filing penalty is five percent of the amount of unpaid taxes you have for each month or portion of the month that the tax return is late. However, there are two more stipulations from the IRS:
- If both the five percent failure-to-file penalty and the failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is five percent.
- If you file your tax return more than 60 days after the tax due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Conclusion: Understand the Issues That Come with Missing the Filing Deadline
You shouldn't avoid filing your business taxes late; it's crucial to pay on time and be transparent with the IRS. At best, you could end up paying thousands of dollars in penalties and interest.
If you’re having problems, work with a tax professional you can trust to straighten out your tax situation. It may cost you in the short term, but it’ll be well worth the long-term viability of your business.
Editor's Note: This post was updated for accuracy and comprehensiveness in March 2022.