Most Common Business Tax Penalty and What to Do About It.
One of the most common letters our clients receive from the IRS is a penalty assessment letter associated with their business entity. And the good news is that the penalties can often be waived.
The penalty is often associated with a business return filing as a partnership (Form 1065) or S Corporation (Form 1120S) for a prior year and the filing is occurring after the deadline. Usually the filing is occurring because a prior return did not account for the full tax savings and the correction will save the taxpayer thousands of dollars. But because it’s late, the IRS assesses a penalty on the business to the tune of almost $200 per partner per month for up to 12 months. For a simple partnership between husband and wife that’s almost $4,800. And if the business needed to file more than one return, the penalty will apply to each year, with each generating letters from the tax man – hardly ever welcome correspondence, even to the most seasoned business owner.
But there is good news. In fact, it’s really good news. If you have any experience with the IRS, you probably are aware that tax penalties are very difficult to remove. But these late filing penalties are an exception. In fact, they happen so often the IRS Commissioner issued a Revenue Procedure several years ago that required the penalties be waived for partnerships if certain criteria are met. With rare exceptions, the first penalty is waived simply as a courtesy. And in almost every case, the other penalties can also be waived for partnerships. The penalties require more work for S-Corporations but we’ve also seen good success in this area.
So if it makes financial sense to file your business returns for prior or current years but you’re worried about the late filing penalties, brace yourself for the unwanted correspondence, but know that it is very possible the penalties can be removed with a proper request.
If you’d like us to determine whether your penalty can be waived or whether the tax savings of filing a late return outweigh the penalty risks, contact our office at (480) 888-7111 to schedule your free consultation.