11/03/2023
Every April, the taxman comes knocking looking for his check. As a small business owner, you must pay your income taxes every quarter and file a tax return by April 15. It is always better to file a tax return late than not to do it at all. If you don't file your return, you must eventually submit a substitute return and face penalties and interest – whether your failure to file was an accident or not.
Red Flags and Tax Documents
Tax documents such as 1099 forms are generated by your clients and vendors and sent to your business and the IRS. The IRS keeps these forms with your other tax documents. CNBC reports that failure to file a tax return when the IRS receives proof you generated taxable income sets up a red flag in the system.
The Pitfalls of Substitute Returns
If you don't file a return, the IRS will eventually generate a return on your behalf. You may think that's a good deal to let someone else do the work – but the IRS may not favor your business with credits, expenses and deductions, and may come up with a higher tax burden. If you receive a substitute return from the IRS, file your own return to replace the substitute. You'll still owe the penalties and interest on your tax debt, so instead of skipping out on your tax return, consider using some of the best tax software that prompts you through the entire filing process to make it less cumbersome and confusing.
Tax Penalties and Interest Charges
The two most common penalties you face are the failure to file penalty and the failure to pay penalty. According to the IRS, the failure to file penalty is calculated as 5 percent of your taxes due each month, not to exceed 25 percent of your tax liability. The failure to pay penalty is half of 1 percent of your total tax liability each month not to exceed 25 percent of your total tax burden. If both penalties are assessed in the same month, the failure to file penalty is reduced by the failure to pay penalty for each month. The IRS declares that after 60 days of failing to file, the minimum penalty is $435 or 100 percent of the total tax. In addition, the IRS charges interest on your tax burden.
IRS Collection Processes
After you file your late taxes – or the IRS does it for you – the collection process begins. According to the IRS, installment plans are available to help you pay back your tax burden over a specific period of time. If you don't set up an installment plan or pay your bill, the IRS collection process can take the money from you. The IRS uses bank levies, garnishments and federal tax liens against property to collect on taxes you owe.
Additional Consequences and Risks
Failure to file your tax return means you cannot get a tax refund back. You have three years to file your tax return to get your refund back. Self-employed taxpayers who fail to file don't get credit toward Social Security or disability benefits. Additionally, the IRS doesn't routinely prosecute individuals who fail to file when they make an honest attempt to rectify the situation. Taxpayers who consistently fail to file their taxes without regard to the law can face criminal penalties.
