What Happens To Late Filers?

The extended deadline for 2014 individual taxes is coming up in less than two weeks. IRS data show that the vast majority of taxpayers, especially households with simple returns and those expecting large refunds, choose to file as early as possible. However, others choose to wait a bit longer, usually either because they need the extra time to get organized or they are still waiting on documents that they need in order to file.

In order for a filing to be considered timely, it must be postmarked by the original or extended due date. E-filed returns must be transmitted before midnight local time on the due date. The IRS grants most extension requests automatically, as long as they are requested in advance of the original due date. If filings and taxes are not submitted timely, then interest and penalties may apply. Here are a few of the more common examples.

Individual Income Tax Returns

Individual income taxes are due on the fifteenth day of the fourth month after the end of the taxpayer’s tax year. For most US taxpayers, this means April 15th (or slightly later if the due date falls on a weekend). Six month extensions are granted automatically, provided they are timely filed. Side note: the IRS allows taxpayers with a compelling reason to request a tax year end other than December 31 (example- a seasonal business that peaks in the spring might operate on a fiscal year ending June 30). If this is you, then your due date will be different.

For an individual tax return (Form 1040), late filers without an extension may be subject to the failure to file penalty, the failure to pay penalty, or both. The failure to file penalty is equal to 5% of the unpaid tax for each month (partial months count as whole months) that the return is late, up to 25% of the outstanding tax amount. If the return is filed more than sixty days after the due date, then the penalty is the smaller of $135 or 100% of the unpaid tax. This means that, even if you have no tax due, you could still be subject to a penalty for filing late.

This is a good place to note that declining to file a return is not an effective remedy for unpaid taxes or other IRS related issues. Even if you can’t pay, you should still file. If you don’t, then the IRS may prepare a substitute return on your behalf, but won’t make a special effort to ensure that you get any credits or deductions to which you may be entitled. As a result, you will almost certainly pay more tax than you owe, in addition to the penalty for not filing a return. If you are due a refund, the IRS will not prepare a substitute return on your behalf. You must submit a return to claim any refund due.

S Corporation and Partnership Tax Returns

Partnership returns (Form 1065) are due by the 15th day of the fourth month after the end of the partnership’s tax year. For 2016 and later, the due date will be a month earlier, or the 15th day of the third month after the end of the partnership’s tax year. S Corporation returns (Form 1120S) are also due by the 15th day of the third month after the end of the year.

Beware: if the partnership or S Corporation is terminated during the year, then the date of termination becomes the last day of its tax year, resulting in an earlier due date. As with individual filings, extensions are available for taxpayers that need more time.

Partnerships and S Corporations are usually not taxpaying entities in the context of federal returns. Thus, the penalty for late filing of a partnership return is a flat $195 per partner for every month or portion thereof that the filing is late. For S Corporations, the $195 penalty is multiplied by the number of shareholders. Thus, for late filing partnerships with mid-year terminations or many partners, the penalties can build up fast!

Corporation Tax Returns

Corporation tax returns (Form 1120) are due by the 15th day of the third month following the end of the tax year. The late filer penalty for a corporation is essentially the same as for an individual- 5% of tax due for each month or portion thereof that the return is late, with a maximum of 25% of the unpaid tax. Corporations may also be subject to an additional late filing penalty of one half of one percent of the unpaid tax amount for each month the return remains unfiled.

In 2016 and later years, the filing deadline will be the 15th day of the fourth month following year end, or April 15th for most corporations.

Payroll Taxes

Last, but far from least, are payroll taxes, the “no-fail mission” of tax filings. Payroll taxes include Social Security, Medicare, and federal tax withholdings from employee paychecks (Form 941/944). For most small businesses with employees, payroll tax deposits are required either bi-weekly or monthly, while filings must be made quarterly. Payroll tax filings are due by the last day of the month following the end of the quarter in which the taxes were deposited or accrued.

Penalties for filing late or failing to make deposits on time are severe. Late depositors are penalized between 2% and 15% of the amount due, depending on the number of days late, plus interest on the unpaid balance. Late filers will pay a penalty of 5% for each month or portion thereof between the due date and the date on which the filing is received.

Payroll taxes, also known as “trust fund taxes” because they are in part withheld from employee pay and paid on behalf of employees, are “no-fail” for small businesses because any and all persons who could have potentially ensured that taxes were paid can be held liable for unpaid amounts. This may include owners, members of management, bookkeepers and outside accountants. It is not uncommon for even low level employees in small companies that had no knowledge of management’s failure to remit payroll taxes to receive levy notices for unpaid taxes due.

Remedies

The IRS allows a taxpayer to request a “first time” abatement (essentially a waiver) of late filer penalties for reasonable cause. Though examiners are provided guidelines as to what constitutes “reasonable cause,” the final decision is left to the discretion of the official assigned to respond to the request. Please contact us if you have a late filer penalty and want to pursue an waiver from the IRS.

These are just a few of the more common penalties, fees, and other sanctions faced by taxpayers that file or pay late. Even if you cannot pay, it is important to file timely. As a full service accounting firm, we stand ready to assist you year round with your filings and other tax issues. Please don’t hesitate to get in touch if we can help.