Taxes

The Steep Cost of Filing Your Taxes Late

The Steep Cost of Filing Your Taxes Late
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Filing late is the most common reason for entrepreneurs to pay penalties and interest to the IRS. Usually, this is caused by our ignorance of tax law or we were just too busy and forgot. These penalties can be incredibly punishing to entrepreneurs.

Related: How the IRS Classifies Independent Contractors

For example, the Limited Liability Company (“LLC”) is the most popular type of incorporated legal entity used by entrepreneurs. When you have more than one member or owner in the LLC, then it is automatically treated as a “partnership” by the IRS. We’re required to file a 1065 Partnership Tax Return for any LLC that has more than one member or owner, even if you made no money or lost money. The IRS always requires us to file a tax return, when we have more than one member or owner in the LLC.

Failure to file the 1065 Partnership Tax Return means that the IRS will charge a late filing penalty. The late filing penalty for a 1065 Partnership Tax Return is $195 dollars per partner and month (up to 12 months). The IRS defines a month as “any part of a month.” This means that a return that is filed one day late is considered late for the entire month.

Related: What to Expect When You're Expecting...Tax Refunds and Obamacare

Here is an example. "Bob, LLC'' has three partners and files their tax return 10 months late. "Bob, LLC'' owes the IRS $585 dollars in late penalties per month ($195 multiplied by three), which times 10 months equals $5,850 dollars in late penalties, not including interest.

Obviously, that is punishing to any entrepreneur’s business, but the IRS does provide us with a silver lining. The IRS has an unofficially policy to provide taxpayers with a “first-time abatement” or forgiveness of late penalties. It’s unofficial because it’s not required by any statutory tax law or regulation. It’s documented in the IRS’ operational manual under their discretionary powers. The abatement is given at the IRS’ discretion, but it is generally given to most taxpayers.

I’ve used this unofficial policy applies to all legal entities such as corporations, s-corporations and etc, to help save entrepreneurs thousands of dollars. Obviously, we should all be responsible for our tax filings. But, keep this benefit in mind because you may need it one day.

Related: How does paying federal and state taxes work for an online business?