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Business Taxes - The Penalties of Late Tax Filing and Late Tax Payments

Timely Filing Taxes to Prevent Avoidable Costs

Small business owners usually start out by focusing their efforts on the daily activities necessary to ensure adequate cash flow and eventual profitability. The preparation and filing of tax returns may be perceived as a business obligation that can be delayed until some later date, but the financial penalties associated with late filing or late paying of taxes provides ample incentive to act now to prevent those avoidable costs.

In addition to interest, additional penalties can be assessed on unpaid tax balances. Alongside the interest calculation is a separate penalty rate applied to the outstanding balance, referred to as the failure-to-pay penalty. If the unpaid balance due is a result of a return that was filed late, another separate penalty applies for the period from the due date of the return to the date actually filed. For this reason, it is most important to file all returns in a timely manner even if full payment is not made. The filing of the return, even without payment, avoids the failure-to-file penalty.
Payroll taxes can sometimes create problems for small business owners. The employment tax return must be filed quarterly, and amounts withheld from employees’ pay must be deposited in a precise, timely manner. Deposits of withheld amounts are sometimes mistakenly applied to the wrong quarter, resulting in an overpayment in one quarter and an underpayment in another quarter. It is essential that withheld funds be kept separate from the general operating funds of the business.

If an outstanding balance is not timely resolved, the collection process will proceed through a clearly defined series of steps. At some point, it is possible that a federal or state taxing authority could levy a bank account. Unlike creditors who must have a court judgment to seize assets, the Internal Revenue Service can simply issue a formal notice of levy. Banks routinely comply when a notice of levy is received and promptly remit any levied account funds.

For personal income tax purposes, small business owners may need to make estimated quarterly payments to avoid a large balance due at tax filing time. Self-employed persons may also be required to pay Social Security tax. If personal taxes are not withheld through some other method, the taxpayer likely needs to estimate and prepay taxes during the year to minimize the final balance due with the actual income tax return.

The failure-to-file penalty is the easiest to avoid. Timely filing, even without full payment, eliminates the possibility of this penalty. The interest rate on unpaid taxes is roughly in line with some credit card rates. The failure-to-pay penalty is much less than the failure-to-file penalty but is assessed until the balance is paid. Small business owners are best served by minimizing these negative financial impacts arising out of late income tax filing or late payments.


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