This is a complete video that explains how all penalties work for individuals and corporations:
Tax filing deadlines
- Forms 1040 (Individuals) and 1120 (Corporations) must file and pay entire tax liability by April 15th for calendar year tax payers. Alternative for fiscal year tax payers, 105 days after closing of fiscal tax year.
- Forms 1120S (S Corporations) and 1065 (Partnerships) information returns due on March 15th for calendar year tax payers. Alternative for fiscal year tax payers, 75 days after closing of fiscal tax year.
Tax filing extensions
- Form 1040 (Individuals) can be extended to be filed up to Oct 15th
NOTE: Extension is to FILE, but not to PAY, must make estimated payment with extension - Form 1120 (Corporations) can be extended to be filed up to Sep. 15th
NOTE: Extension is to FILE, but not to PAY, must make estimated payment with extension - Forms 1120S (S Corporations) and 1065 (Partnerships) information returns can be extended to be filed up to Sep 15th
Tax payment deadlines
- Forms 1120S (S Corporations) and 1065 (Partnerships) information returns, generally do not have tax payments to make, as they are “pass-through” entities
- Forms 1040 (Individuals) and 1120 (Corporations) must pay their taxes throughout the tax year, in quarterly estimated payments for Corporations and Self-Employed individuals, and/or via payroll withholding for employed individuals.
If there is an tax liability and no estimated taxes or withholding has been made, 100% of the 1120 and 1040 taxes MUST BE PAID ON APRIL 15th (even if extension to file has been filed)
Penalty for Failure to Timely File Return
- Forms 1040 (Individuals) and 1120 (Corporations)
- If you do not owe taxes on a form 1040 or 1120 (or are due a refund), there is no penalty for late filling.
NOTE: There is a 3 year deadline for requesting a refund on a late filed form or amendment - If you owe taxes from a 1040 or 1120 form that is filed after April 15th (without extension), the penalty is 5% of the taxes due for EACH month that the tax return is late filed, up to 25% of the tax due
Example for 1040 and 1120 forms
If you file a 2015 tax return on April 15th, 2017 (12 months late) and the tax owed was $20,000, the penalty would be:
$20,000 x 5% = $1,000 x 12 = $12,000, but is capped at 25% of taxed due, so this penalty would cap at $5,000 Penalty for late filling
Penalty for Failure to Timely File Return
- Forms 1120S (S Corporations) and 1065 (Partnerships)
- Whether you “owe” taxes or not on derived from a 1120S or 1065, there is a penalty for late filling after March 15th (if no extension was requested; and even with an extension, filling after Sep 15th will have a retroactive penalty from March 15th
- Fee is $195 per shareholder/partner per month that the form is late, capped at 12 months
Example for 1120S and 1065 forms
Partnership files a return on October 15th, 2017 for 2016 tax return, an extension was filed, but because it failed to file by Sep 15th, it is now 7 months late. Partnership has 2 partners
$195 x 2 partners x 7 months = $2,730 Penalty for late filling
Penalty for Failure to Timely Pay Tax
- Forms 1040 (Individuals) and 1120 (Corporations)
- If you do not owe taxes on a form 1040 or 1120 (or are due a refund), there is no penalty for late filling.
NOTE: There is a 3 year deadline for requesting a refund on a late filed form or amendment - If you owe taxes on a form 1040 or 1120 form that is filed after April 15th (even with an extension), the penalty is .5% of the taxes due for EACH month that the tax return is late filed, up to 25% of the tax due
Example for 1040 (Individuals) and 1120 (Corporations)
An Individual filed their taxes on “on time” at October 15th with an extension, but owes $10,000 in taxes
$10,000 x .5% x 6 months = $300 for failure to timely pay
NOTE: this one is also capped at 25% of taxes due, so if it is paid 5 years late, this tax would be $2,500 max
Combined Late Pay and Late File
For 1040 (Individuals) and 1120 (Corporations) the combined rate for penalty is 5% per month, with a cap of 25%
Penalty for Underpayment of Estimated Tax
- Forms 1040 (Individuals) and 1120 (Corporations)
- If you owe more than $1,000 on April 15th, there is a penalty for not paying your taxes throughout the year via quarterly estimated taxes or via payroll withholding of at least 90% of your total tax liability or 100% of your previous year’s tax liability
- Estimated payments must have been made in 4 quarterly installments on April 15th, June 15th, Sept. 15th throughout the actual tax year and January 15th of the following year
Forms 1040 (Individuals) and 1120 (Corporations)
Use form 2210 (Individuals) to calculate the penalty, its about 2.7% if paid on April 15th, and increases to .011% PER DAY, if paid after April 15th
2220 (Corporations), there are special rules for corporations due to Seasonality Methods and or Annualized Income methods for calculating it. Generally is 4% APR from the day of the quarterly estimated tax due, calculated for EACH quarter individually for a 1/4th of the tax due
Plus interest for payments beyond April 15th, based on IRS current interest rate. Check IRS website, it is 3% to 4% APR
Example for Individual form 1040
A self-employed individual tax payer fails to make estimated payments throughout the quarter and has no payroll withholding, so they file and pay 100% of the tax due ”on time” on April 15th, the previous year, they had a tax liability of $10,000 and this year they have the same $10,000 in tax liability.
$10,000 x 2.7% = $270 Penalty for Underpayment of Estimated Tax
Interest
- All tax liabilities are subject to Interest rates when they are not paid by April 15th, the interest rate can change as it is tied to the federal-short-term rate + 3%
- Today, that rate is 4%
- For example, once all penalties and tax liability is calculated, if a taxpayer pays that liability on May 15th (30 days late), a liability of $12,270 will pay in addition about $17 in interest
Penalties, interest, and liability
- All penalties and interest are combined!
- It is important to file by the deadline even if you cannot pay the taxes yet
- You can arrange a payment plan with the IRS, they will charge a payment plan fee of $40 to $225 to establish it (depending on the terms, income bracket, and form of payments) but all other penalties will still apply to the remaining balance as the liability is paid down
Failure to file information returns
- Forms 1099-MISC must be filed for all individuals receiving compensation from your business of $600 or more for the year.
- 1099-MISC forms are due on January 31st, late filing them within 30 days is a $50 fee per form (capped at $532,000) and $100 per form if filed 31 to 180 days late (capped at $1,596,000), Filed after 180 days, or not at all is $260 per form (or possibly $530 per form if is deemed an “intentional disregard” with no cap!)
Transcript:
Hi everyone and welcome to Tax Power Hour, today’s episode is late filing and late payments penalties for IRS tax returns, this is a bonus video from our regular webinar series and today’s date is March 12th, 2017, it is important to point out today’s date because the tax law may change, so obviously if you’re watching this in 2018, 2019, 2020, whenever it is that you’re watching this, the law may be different so maybe you wanna check up on the IRS website to see if something has changed. Anyway, if you’re watching this during 2017, this law should apply to the current tax returns.
I am Hector Garcia, I’m a CPA, an accountant, and Tax Planning and QuickBooks consultant in the Miami area, if you need to contact me, if you have any questions about tax, accounting, or QuickBooks, you can email me at hector@garciacpa.com. Quick disclaimer, I may not give any written or electronic advice based on unreasonable assumptions. Therefore, anything that I’m talking about here, I’m talking about general terms, I’m not talking about specific circumstances, you should always consult your own tax professional to make sure that it aligns with your current tax situation. If you don’t have a tax professional, you can literally google directory of federal tax return preparers with credentials and you will get the IRS listing of all them, however, if you wanna hire me, you can obviously do that, my email is hector@garciacpa.com. Just email me and we may be able to work together.
Anyway, there’s two really important resources I wanna point out, one is the eight facts about IRS penalties and publication 504 about underpayment penalties, so let me pull both of those up, just so we can see here in context. So this one called Eight Facts About Failure to Pay and Failure to File Penalties kinda goes through what all the penalties are into eight bullet points, so definitely, you’re welcome to look at that resource, and also there’s publication 505, actually, which talks about underpaying penalty and that’s a little bit more complex, just because there’s a lot of numbers in the calculation process and it kinda walks you through under what circumstances you would get an underpayment penalty for not filing or paying estimated tax returns, et cetera, but I wanna go over all of those in detail, but I wanted to make sure we make those two links available and we’ll put them in the comments section on the video as well. And today’s content is tax filing and payment deadlines so first I wanna make sure that we understand which income tax returns we’re talking about and what all those deadlines are.
Now we’ll talk about the late filing fees, so if I file late, I get a fee called failure to, penalty for failure to timely file the return. If I pay late, there’s a penalty for failure to pay tax timely and there’s also an underpayment of estimated tax penalty which is if you have not made your tax payments throughout the year. And the fourth penalty is just interest charges by the IRS and the last topic we’ll talk about, the failure to file information returns, most specifically for 1099 forms. Now, what is not being covered in this video? We’re not gonna be talking about payroll taxes, no payroll forms, like 940, 941, W2, we will not be talking about that. We will not be talking about any state income tax returns or local county, city income tax returns. We will not be talk about foreign asset disclosure returns, often called the FINCEN returns. We will not be talking about sales tax, we will not be talking about gift and estate taxes. Also, we’re not gonna be discussing penalties for inaccuracy, substantial underpayments, negligence, disregard of rules, assessment during audits, frivolous positions, those are all other sorts of penalties that are out there, we’re gonna talk about the regular penalties that most people get.
Now, the penalties we’ll be discussing will be concerning the individual income tax return, which is the form 1040, the corporate income tax return, which is the form 1120, the S Corp tax return or the Subchapter S tax return which is the 1120S, that’s called an information tax return because it doesn’t pay tax, and a form 1065 partnership, also another information tax return that can get penalties for late filing but they don’t pay taxes in itself, they’re called pass-through entities. And lastly, we’ll talk about 1099 Miscellaneous which the IRS is cracking down on quite a bit. So let’s talk about the tax filing deadlines.
First, first, a form 1040, an individual tax return for an individual person or a form 1120 for a corporation or often called a C Corp, both of those must file the return and pay the entire tax penalty by April 15th. If you are in a calendar year taxpayer situation, if you’re in a fiscal, then you just add 105 days to whatever end of the year that you have, and that would be your filing deadline and payment deadline as well. Now, the forms 1120S and the 1065, which is the S Corporation and the partnerships, those have different deadlines, those have to be filed by March 15th if you’re in a calendar year taxpayer, or 75 days after the year closes, so most people, March 15th, so that’s a different deadline, so April 15th is for individual and C Corporations and March 15th is for partnerships and S Corporations. Now you can file extensions if you’re an individual taxpayer filing a form 1040, you can file an extension and extend it all the way to October 15th. Now even if you file an extension, the extension will only be for filing, it will not be for paying. You still must make an estimated tax payment by April 15th with that extension. Now if you have a corporation form 1120, you can extend that all the way to September 15th, same circumstance, the extension is for filing, not for paying, so you must make an estimated tax payment with that extension by April 15th. Now, if you have an S Corporation or a partnership, those are due March 15th, as I mentioned before. And those can be extended to September 15th, so the deadline for pass-through entities like S Corps and partnerships are March 15 and under extension, September 15th, and for corporations, C Corporations, that will be April 15th, but under extension is September 15th and the personal is the one that can be extended up to October 15th. Now, tax payments are due for corporations and individuals by that April 15th date. If you have an S Corporation or a 1065, a partnership, those generally do not pay taxes. Now I say generally because there are some special rules, specially for corporations that were converted that would have to pay some sort of tax, but generally speaking, S Corporations and partnerships that don’t have foreign partners have to file by that March 15 deadline and they never really pay taxes because they pass through the profits through their owners. Now, the individual taxpayers and the corporate taxpayers, those are supposed to file and pay their dues by April 15th but if they have a tax liability on April 15th, they were actually supposed to make estimated taxes or withholding the payroll throughout the entire year via something called quarterly estimated tax payments. If you don’t make quarterly estimated tax payments, there’s another penalty called failure to underpay estimated taxes or underestimate taxes so we’ll discuss that later on. So again, if there’s a tax liability by April 15th, you’re supposed to pay that entire liability by April 15th even if you file an extension and even if you pay the whole thing in time, there may be a failure to underestimate or underestimating quarterly taxes. We’ll discuss all of those in detail. Now, let’s talk with penalty for failure to timely file the return, so we’re talking about filing late.
If you have a individual tax return, a form 1040 or a corporation, a C Corp form 1120 and you do not owe any taxes, there’s actually no penalty, zero penalty, for filing late. And if you do a refund, the deadline to file that late return and get that refund is three years, so if you are past that three-year deadline, you can still file the return late, not get a penalty, but you will not get that refund. And there’s some special circumstances in which you can, but we’re talking about for the most people. Now if you do owe taxes, so at the end of April 15th, you’re an individual taxpayer or a corporation and you do owe some sort of taxes, you must pay that entire thing by April 15th. If you don’t pay it, even you have extension, if you don’t pay it, you’re gonna get a penalty. However, we’re specifically talking about the penalty for filing late, so if you file an extension on a form 1040 and you file by October 15th, you will not get any penalties. If you file an extension for a form 1120, corporation, and you file by April 15th, you will not get a penalty. Now, if you don’t file that extension or you pay past that extension deadline, the penalty for filing late, it’s 5% of the taxes due per month that the tax return is late, up to, and there is a cap, a cap of 25% of the tax due, so let’s do an example. For 1040, an individual tax preparer, that’s filing a 2015 tax return a year late on April 15th of 2017, so again, a year later, 12 months late and the tax owed was $20,000, what would the penalty be? So we’ll take the $20,000, multiply it times 5%, that gives me 1000 times 12 months, that gives me 12,000, but the cap is 25% of the tax due, therefore the penalty would cap out at $5000 for filing the return late, we’re just talking about late filing, we’re not talking about paying late, we’re talking about late filing only. Now, let’s talk about S corps and partnerships.
Now these are different S corps and partnerships do not pay taxes generally. Even if you owe some sort of taxes deriving from the net income of the S corp or the partnership, the penalties are actually just for filing late, so whether you owe taxes or not owe taxes on the returns that own those S corps or partnerships, that’s irrelevant, if you file late, you will pay late. You can file an extension for an S corp or a partnership 1065, extend it all the way to September 15th, and as long as you file by September 15th, you’re good to go. If you file late, if you file in September 16, you are going to be officially six months late, so the late fee is retroactively, all the way back to the original filing late on March 15th if you fail to file within that extension period. Now the fee for late filing is $195 per shareholder or partner per month that the form is late capped at 12 months, so the cap is a little bit different on S corps and partnerships. Let’s do an example, let’s say if we have a partnership that files a tax return on October 15th. Now, they did file an extension, so for most people, they would be a month late, however because you failed to file within the September 15th deadline, you’re technically seven months late ’cause you were supposed to file on March 15th. Now anyway, if a partnership has two partners, then we have to take 195 times two partners times seven months and the penalty for filing a partnership return in October would be $2,730, so quite extensive, pretty big penalties for that, so make sure you file your S corps and partnership returns on time even if you don’t owe any taxes because the penalties are substantial. Now, what about a failure to pay on time, it’s a little bit different than filing late, pay on time. For 1040 individuals or 1120 corporations. If you do not owe any taxes on a form 1040 or 1120, there’s no penalty for late filing, and obviously there’s no late paying because you don’t owe any taxes. And as I mentioned earlier, there’s a three-year deadline for requesting refunds for late-filed returns. If you do owe taxes, if you have a tax liability for a form 1040 or 1120 so individual corporations, you must pay that by April 15th, even if you have an extension, you must pay that by April 15th. The failure to not pay the tax, different than filing, to pay the tax, it’s .5%, so half a percent of the taxes due for each month that the tax return is late, or in this case, that the tax payment is late ’cause the tax return could have been filed on time. And there’s a 25% cap on that. So let’s do an example, let’s say we have an individual that files a return on time, on time, October 15th because they had an extension so they will not get a failure to file timely, they’re gonna fail that on time, on the deadline, October 15th, and they owe $10,000 in taxes. Now, because you didn’t pay that back in April 15th, even if you had an extension, you’re gonna pay $300 in failure to timely pay, why? Because you got 10,000 times half a percent times six months, that’s where you get. And the cap for this is also the same 25% that we had on the failure to file on time. So if you were to pay a tax five years late, the tax would cap at $2500 with a $10,000 liability from 10 years ago because there is that 25% cap.
Now if you both file late and pay late, which is possible, very common, by the way, on an individual tax return or a corporation, the combined penalty, it’s 5% with a cap of 25, so it wouldn’t be that 5% plus that .5%, it would cap at the 25% lifetime and the 5% per month. So those are the failure to pay and failure to file. Let’s talk about the most misunderstood of all the penalties, most people understand, they file late, they’ll pay a penalty, but even if you pay on time, you may get a penalty for underpayment of estimated taxes. So we’re talking about individuals and corporations. If you owe more than $1000 on April 15th, there’s a penalty for not paying those taxes throughout the year, you’re actually supposed to pay quarterly estimated taxes or withhold via your payroll, if you’re an individual. Of at least 90% of your total tax liability for the year, or 100% of the previous year’s tax liabilities, whichever is highest, so if you owed some money last year, you better pay the same amount this year to avoid a failure to under, a failure to pay estimated taxes. Now, usually you make those payments quarterly on specific dates or by specific dates, so quarter one, it’s April 15th, quarter two, it’s June 15th, quarter three is September 15th throughout that tax year, and quarter four would be January 15th, so as long as you make four equal payments of the entire tax due that you’re gonna pay in the future in the April 15th, if you make it throughout the year then you don’t pay an underpayment of estimated tax penalty but if you don’t make that penalty, sorry, if you don’t make that payment, you’re gonna get that penalty even if you file and pay on time. So let’s discuss the forms. So for the underpayment of estimated taxes, a little bit more complicated. There’s a specific form that has a very long formula. For individuals, this form, 2210, so you can google that, take a look at that, on the 2016 tax year, the penalty, it’s about 2.7% for underpaying taxes on April 15th and then if you pay them past April 15th, it goes up .001% per day, so it’s a daily cumulative amount. For corporations, it could be different because there’s special rules for seasonality and annualized income, so if you got a business that makes all their income during the last quarter, it would be unfair that your penalty will be for not paying the first quarter of estimated taxes ’cause you really didn’t have any money to pay so that form 2220 allows you to make all those calculations. Generally speaking, you pay about 4% APR on the day that you pay compared to the day that you were supposed to make that estimated payment. It’s kind of a pretty long, complicated formula. Most tax preparers have tax software that does this but it’s important for you to know that that tax is there and if you pay past April 15th, you gotta check the IRS website for the current interest rate. Typically between three and 4%, or it has been in the last couple years. This is sort of interest for not paying by that April 15th date, so let’s do an example of that. So we have a self-employed individual that fails to make their estimated taxes throughout the year and has no payroll, they went ahead and they filed and paid 100% of their tax on time on April 15th. But last year, previous year, they actually paid $10,000 in taxes. This year it ends up being about the same. So the IRS says, “Hey, because you paid $10,000 “the previous year, you should have paid $10,000 “throughout the year in four quarterly payments “of $2500 each in order to make those estimated payments.” So if you don’t make those payments, but you do make your entire taxpayer on April 15th, that will be about 2.7% of a penalty for that, so on a $10,000 liability, you’re gonna pay the $10,000 plus $270 for underpayment even if you pay and file on time on April 15th. Now, interest is the other one. Typically, IRS takes the federal short-term rate and adds 3% to that, today that’s 4% so on top of all those penalties for filing late, paying late, after April 15th, they start accruing interest, the penalties and the tax too. And those accrue an interest at about 4% APR and that is in a daily compounding basis, but it’s 4% APR. So even if you pay taxes a month late on May 15th, you’re gonna have to calculate on, for example, $12,270, calculate that 4% APR for 30 days, which is about $17, so you not only pay the failure to underpay your estimated taxes, but you also pay interest if you pay past that April 15th deadline. Now in a nutshell, we got penalties, we got interest, and we got liabilities. Remember that these are not all mutually exclusive, these are typically all combined. I recommend that you file on time even with an extension, file on time, even if you can’t pay the taxes because the failure to file penalties, the late-filing penalties are typically much higher than the late payment penalties so the IRS wants you to at least file on time and if you can’t pay, make a payment plan. Arrange it with the IRS. Now the IRS will typically charge between 40 and $225 to establish that payment plan, depending on how you pay, if it’s an automated payment, your income brackets and that sort of thing and that will be on top of all the other penalties and all those penalties still apply with a payment plan until the balance goes all the way down. But again, you wanna file on time even if you can’t pay and then make an arrangement to make a payment plan with the IRS.
Now changing gears a little bit, let’s talk about the form 1099 Miscellaneous. This is a form that businesses have to give individuals that are being paid from that business compensation. So a subcontractor, an independent contractor, a consultant, a person working part-time but is not an employee and is getting paid for straight payment as a contractor or for consulting services. The business must file a 1099 Miscellaneous. If that form is not filed by April 31st, there’s a late filing fee of $50 per form if you file within 30 days of that January 31st deadline. And there’s a cap of $500,000 on it, so if you got a pretty big business with a lot of 1099s, that’s gonna be per form. Now if you file after those 30 days late, you file, let’s say in March and you have all the way through end of July, that would be $100 per form and the cap is much higher, $1.5 million. If you don’t file within that six month range, 180 day range, and you file afterwards or you don’t file at all, the fee per form is $260 per 1099 that’s not filed or if the IRS deems it intentional disregard, it can go all the way to 530 per form per person that you don’t file form and there’s no cap so that’s a really important one, lot of people are not paying attention to that one. The IRS is definitely cracking down on 1099 Miscellaneous forms.
Now stay connected if you have any other questions about tax, join our Facebook group, it’s called Tax Power Hour, just search in Facebook for a group called Tax Power Hour, there’s a whole bunch of tax practitioners, accountants, and tax enthusiasts in that forum, in that group, that answer questions, ask questions, so you’ll learn a lot of about tax. If you have a specific question for me, email me. hector@garciacpa.com, even if you don’t intend to hire me as your accountant, ask me a question, if it’s simple enough, I’ll answer it. Otherwise, you do wanna hire me, there’s my email. And I also recommend that you join our webinar series, we started a webinar this year in 2017, it’s the third Wednesday of every month at noon and it’s called Tax Power Hour and there’s the link, I’ll put that in the description as well. We talk about all sorts of different tax topics every month. Now I hope that this was informational and this helps. You got my email if you have any questions. Otherwise, thank you very much for joining us today and have a wonderful day.
