IRS Tax Penalties Can Shut You Down!
What's the difference between the IRS' collection process and the Mafia's? The Mafia doesn't doesn't send out written delinquency notices and the IRS doesn't break legs! But there is one thing they both have in common - the ability to instill fear!
The IRS assesses a variety of penalties as a result of noncompliance with the tax laws. Some penalties are more severe than others. For example, if you have employees, you can be subject to the trust fund recovery penalty. This is among the harshest of penalties. It is 100% of the unpaid taxes! .
Trust Fund Taxes
If you have employees, it is essential to prepare an accurate payroll, pay employees timely, and comply with reporting and payment requirements. The IRS is particularly aggressive in enforcing the collection of Trust fund taxes.
Trust Fund Taxes Include:
- Federal income taxes that should have been withheld
- Social security taxes (the employee's share)
- Medicare taxes (the employee's share)
To ensure compliance with complex payroll tax rules, it would be a smart move to use a reputable payroll service. Screwing up payroll reporting and payment requirements can cost you dearly!
Check out Intuit's online payroll for free:
Benefits of using a payroll service:
- Relatively inexpensive
- Eliminates hours of tedious work and frees up time you can use to engage in more profitable activities
- Ensures compliance with filing and deposit requirements
- Avoids wasting precious cash on costly noncompliance penalties and interest!
- Provides you with a record of all your payroll activity
Tip: Never make the mistake of using trust fund taxes to pay for other business expenses, assuming you'll eventually replace those funds. What if you don't? Keep in mind, the IRS views noncompliance with employment tax rules as a serious matter and aggressively enforces collection of these taxes and will assess stiff penalties!.
Bankruptcy Won't Eliminate Trust Fund Taxes
If an employer files bankruptcy in an attempt to escape paying trust fund taxes, it won't help; they're not dischargeable in bankruptcy.
Moreover, the IRS may burrow deep into the organization to find any individual(s), beyond just the owner(s), it deems legally responsible for violating the trust relationship between the business, the employee(s), and the government for withholding and remitting of trust fund taxes. This means even your bookkeeper may be a potential target!
There are two types of penalties in connection with filing a return:
- Failure to file penalty
- Failure to pay penalty
The failure to file penalty is 5% of the unpaid taxes for each month or part of a month, up to 25%. The failure to pay penalty is 1/2 of 1% of the unpaid tax per month or part of a month, up to a maximum of 25%.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Since the stiffer penalty is for failing to file timely, you should at least file your tax return on time, even if you can't afford to pay the tax due. Of course, if you can pay part of the tax due along with your timely filed return, the failure to pay penalty will be lower.
Most do-it-yourselfers use tax software or simply eFile online, so arithmetical errors are not a problem, unless incorrect amounts were entered.
Failing to attach the applicable tax documents to your return can result in significant delays in processing your return. For example, if you had taxes withheld, whether from your wages or pension distributions, you must attach a copy of these documents to your return (I.e. Form W-2, 1099-R) to ensure timely processing by the IRS, as well as state and local tax agencies.
Pay As Much as Possible:
As previously mentioned, the IRS assesses a penalty for failing to pay. If you cannot pay the full amount of the tax, try to pay part of it. Any amount paid timely will reduce the amount of the failure to pay penalty.
Penalty Abatement Request
In order to avoid having to pay IRS Tax Penalties or to have them refunded back to you if you already paid them, you need to complete Form 843, Claim for Refund and Request for Abatement, and ask the IRS to remove the penalty. See Reduce or Remove a Penalty.
Submit a Penalty Abatement Request if you can show reasonable cause for not paying the taxes, have demonstrated due diligence, and did not intentionally neglect to pay your taxes.
What is reasonable cause?
Reasonable cause may be asserted when a taxpayer exercises ordinary business care and prudence in determining his or her tax obligation, but is unable to comply with that obligation due to circumstance beyond his or her control.
For example, an Administrative Waiver may be granted as a result of a formal government directive providing penalty relief because of a natural disaster or catastrophic event.
For Freelancers and independent Contractors
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Have an accounting or bookkeeping question? Email it to me.
- Return to the IRS Penalties Table of Contents to find related links.