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Learn about the penalties you may face and what your options are if you can’t pay taxes on time.
Denise Beeson, a small business management instructor at Santa Rosa Junior College in Windsor, Calif., knows what it’s like to hear bad news from the IRS. Due to a technicality in her tax reporting, she received a letter notifying her of a large delinquency in her tax payment.
“It kind of makes your heart stop,” says Beeson, who resolved the issue without penalty.
Some companies aren’t so lucky. Too often, small business owners pay heavily for mistakes later on when striking a compromise could have mitigated the buildup of fines. If you suspect you might come up short at tax time, consider these points:
The failure-to-pay penalty is half of 1 percent of your unpaid taxes for each month you’re late. If you had a bad year, then paying late may seem like no big deal. But that penalty can amount to as much as 25 percent of your unpaid taxes.
Some business owners stall filing until they have the total amount due. However, the penalty for filing late is usually 5 percent of the unpaid taxes for each month your return is late. The more you owe, the more difficult it will become to catch up.
If you can’t pay everything you owe, file your return on time and pay as much as you can, then explore other payment options. The failure-to-file penalty is generally more than the failure-to-pay penalty, so meeting that deadline is your first priority.
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Extensions can protect businesses from hefty penalties, particularly if the discrepancy between what they owe and what they can pay is minor. If you pay at least 90 percent of your tax liability by the original due date, you won’t face a failure-to-pay penalty, provided the remaining balance is paid by the extended due date. Furthermore, you can avoid penalties if you can show that the failure was due to a reasonable cause beyond your control.
Turbo Tax will save you money in the short run, but it’s still a good idea to have a relationship with a CPA you can call if the IRS disputes your return. Beeson urges small business owners to work with a CPA familiar with their situation to strategize the next step. Whether you choose a business line of credit, a personal loan or a payment plan with the IRS, any alternative payment option is better than no solution at all.
Click here for more information on tax penalties.
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