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Updated: Nov 20, 2019
Computing and settling your tax liability can seem like a daunting task. For the long term viability of your business however, you cannot afford to trivialize this activity. Failing to get your returns in on time or neglecting to file altogether could have serious implications for your business. Here’s a look at three potentially costly consequences of skipping a tax filing.
When a business fails to file a return by the advertised deadline, it begins to accrue a penalty with the IRS. The type of penalty levied depends on the structure of the business and whether or not it owes a payment.
For each month [or portion of the month] the return remains outstanding, sole proprietorships, partnerships and corporations with a tax balance, incur an additional 5 percent charge on the balance. This penalty tops out at 25 percent of unpaid taxes.
A sole proprietor who owes no taxes or is due a refund, incurs no penalty for a late filing. This is not the case for partnerships and corporations. A charge of $195 per shareholder is effected for each month the return is late, if the business owes no taxes. These charges accumulate rapidly. A business with three shareholders, for example, incurs a $585 penalty for each month the return is late. A six-month delay would mean a charge of $3,510.
In instances where businesses file their returns but fail to pay the taxes owed, a separate failure to pay penalty – ½ of 1 percent – is applied to the business’s tax liability, for each month [or portion of the month] the outstanding payment is delayed.
Keep in mind that the IRS applies a separate interest rate for underpayments. As of Q4 2015, the underpayment rate is set at 3 percent [5 percent for large corporations].
If your business tax filing is delayed for too long, the IRS could decide to file a substitute return on your behalf. While this suspends the failure to file penalty, you forfeit the chance to ensure that all the deductions and exemptions you’re entitled to are appropriately claimed.
Once a substitute return is filed and an assessment of taxes due is issued, the IRS can take additional actions to collect what is owed. You open the door to a levy of your business and/or personal bank accounts, as well as a federal tax lien.
A tax lien allows the IRS to lay claim to a sole proprietor’s personal property. In the case of partnerships and corporations, property owned by the business would be at stake. This includes physical assets as well as accounts receivable. Once a tax lien is in place, it cannot be removed until the debt is cleared. A tax lien will show up on both your personal and business credit reports.
Failing to file your taxes can impact your business’s ability to qualify for loans in two ways. Firstly, any time you apply for a term loan or line of credit, lenders will request copies of your tax returns to verify your stated revenues. If you do not have your returns, you will not be approved.
Secondly, if a delayed filing results in the imposition of a tax lien, lenders will view that blemish on your credit reports as a red flag. A business owner who has a history of not settling debts is a risky prospect for a lender.
Getting your return in on time should be a priority, even if you cannot pay the taxes owed in full. The IRS offers payment plans, and in some instances, penalty abatement, for small businesses with a past due balance. The longer you delay filing, the more damage you could be doing to your business. Take the prudent course.
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Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor's degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.