Austin Tax Blog


As the tax season approaches every year, business owners stress out regarding the IRS fines and penalties they may inevitably have to face. The IRS imposes penalties on small and medium-sized enterprises (SMEs) that fail to comply with their tax rules and regulations. 

As per the Internal Revenue Code (IRC), there are over 150 civil penalties alone that businesses need to watch out for regularly. Tax penalties are not deductible and ultimately add costs to the business. 

Small and mid-size business owners try their best to avoid such penalties and reduce the overall impact on operational activities. Whether you make inconsistent payments, file late or have underpayments; you will be subject to fines and penalties to the IRS. This article covers some of the common IRS tax penalties that SMEs often have to endure. 

Late Filing or Payment Penalties 

The deadline to file your individual tax return is generally April 15, but it is not the only deadline for other returns that small and medium-sized businesses have to submit. Moreover, if you fail to file after 60 days, the minimum penalty is set at $135 by the IRS on your total tax return. It is vital to understand that the IRS can collectively impose penalties on late filing and payment. Taxpayers, however, do not have to pay penalties if they file an automatic extension and have already paid 90% of the tax liability before the due date. 

Penalties for Filing Delayed Business Tax Returns 

If you file returns with balances due after March 15, you may be subject to a 5% penalty for what you owe each month. 

If your small or medium-sized business operates under a partnership structure, each partner will be required to pay $89 as a penalty for late filing. The return is essentially multiplied by a total number of partners. The IRS will lift the imposed penalty if SMEs present a reasonable cause for late filing. 

Penalties on Stating Inaccurate


Stating inauthentic information to the IRS grounds for various penalties. Fraudulent returns and negligent returns are the two most filed returns that the IRS imposes accuracy related penalties. 

Your total tax understatement is used to impose a 20% penalty on any unpaid tax. However, if the IRS authorities find a deliberate connection or attempt to falsified information; the penalty could spike up to 75% on your total tax owed.. 

The IRS Penalties for Negligence/Fraud

The complete disregard for the IRS rules and regulations is not taken lightly. In a number of cases, negligence/fraud often results in criminal prosecution. If you can, on the other hand, substantiate or rationalize your tax position to the IRS; the penalty may be lifted and the action would be deemed reasonable. 

Another fraudulent return is a frivolous tax return. The IRS recently instructed taxpayers to not file frivolous tax returns as a basis for arguments. Filing a frivolous tax return is equivalent to getting a penalty of $5,000. And if you file a joint tax return, additional penalties could be imposed on your spouse as well. The use of frivolous return is discouraged by the IRS primarily because it does not contain enough information to collaborate what’s presented in your tax report. 

Trust Fund Recovery Penalty 

Trust Fund Recovery Penalty (TFRP) refers to the trust fund taxes or payroll taxes that companies pay on behalf of their employees. SMEs have to withhold employees’ taxes in trust and the information along with the payment can be sent to the IRS each month. However, the IRS can potentially hold employees accountable for non-compliance of collecting the taxes but not paying the taxes. This vicious pattern sometimes puts small and medium-sized businesses at risk. 

Additionally, small business owners have to be cautious about filing accurate business tax returns and to help minimize any potential IRS imposed penalties. The more small business understands changing tax laws, the more chances it will have to steer clear of tax penalties. 

Look Out for Bounced Checks 

If you are paying your taxes with a check and your check bounces, the IRS can impose enough penalties to make your head spin. Consequently, 2% of the fine is attached to the total amount of your check. However, if your check amount is undervalued at $1,250, you will just have to pay $25 as a penalty. 

How to Avoid the IRS Penalties 

Small and medium-sized businesses have to be extra careful to file on time. However, if you are overwhelmed by the amount of data, you can always hire a professional tax expert (IRS Enrolled Agent) who can guide you to assess penalty risks and correctly file tax returns. If you want to be saved from the wrath of IRS penalties, simply adhere to the IRS Tax Code

The first abatement option allows you to escape a certain amount of responsibility, but that does not mean you should overlook the key deadlines. This is where the importance of hiring a well-informed tax consultant becomes essential to maximizing your tax exposure.