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What Are the Tax Penalties for Small Businesses?

Small business owners are easy prey for the IRS. “Ignorance is no excuse” is the rule of thumb for owners of small enterprises; unfortunately many individuals jump into the world of business ownership without having a clear understanding of the complexities and nuances of tax codes.

Common Tax Penalties

A mistake small business owners often make is not having a financial advisor in their corner. This is especially dangerous for a fledgling business that is struggling just to make enough to pay debts incurred at start-up; tax penalties can be significant, and will not only strip away any of the potential profits, but place the company’s future in doubt.

  • Late Filing: This penalty amounts to 5% per month of the total tax that is owed. Over six months, this is a full 30%. If you are unable to pay your taxes, make sure to file on time. You can then request to enter into an installment agreement.
  • Late Payment: While this penalty is .5% per month for the amount your business owes, this can quickly cancel out any profits you may have. The total penalty can ultimately be 25% of the unpaid tax.
  • Estimated Tax Underpayment: This is a very common penalty for those who are self-employed. You must pay at least 90% of the amount you will owe quarterly.
  • Inaccuracy: Amounting to as much as 20% of your total tax liability, this penalty is assessed after an audit finds deductions that cannot be substantiated or the total income was not reported.
  • Fraud: This penalty is relatively rare, for the IRS must prove that you had fraudulent intent on your return. However, the penalties are great, up to 75%.
  • Tax Evasion: One usually associates tax evasion with cases that seem larger than life, such as mafia leaders. This is because the cost of proving that you purposefully evaded paying taxes can be prohibitive; therefore, the IRS generally does not pursue small business owners for tax evasion. The penalties here are also great—up to $500,000 and 5 years in federal prison.

Ultimately, to ensure that a small business keeps above water in the sea of taxation regulations, it is imperative that they have legal and financial advisors in place for guidance.

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