You might be wondering, “Why should we pay tax?” Aside from compliance, one of the main reasons why taxpayers should file and pay taxes on time is to avoid interest and penalties. Taxpayers should file an extension if they know ahead of time that they won’t be able to meet the deadline.
However, it is important to note that an extension to file does not mean an extension to pay. If the taxpayer owes money on a return with an extension, they must pay by the original due date. Failing to pay taxes on the due date can result in them incurring penalties and interest. The IRS charges different types of penalties and interests depending on the nature of noncompliance.
Key Takeaways For Paying Taxes On Time
- Avoid interest and penalties by filing and paying taxes on time.
- File an extension if you cannot meet the deadline, but remember it is not an extension to pay.
- The IRS charges different penalties and interests depending on the nature of noncompliance.
- Corporations must pay estimated tax payments if they expect their tax liability to be more than $500.
- Failure to comply with reporting requirements can result in automatic penalties.
Failure to File Penalty
The IRS imposes a failure to file penalty if the taxpayer does not file the return by the deadline. For C Corporations, there are no penalties for late filing if there is no tax due. But if Form 1120 is showing an income tax due, the monthly penalty is 5% of the unpaid tax up to a maximum of 25%. Returns more than 60 days due incur a minimum penalty of smaller of the tax due or $135.
Penalty Breakdown
- 5% per month – This applies to the unpaid tax, not the total tax liability. The penalty accrues monthly, calculated from the original due date until the return is filed.
- Maximum of 25% – The penalty stops accumulating once it reaches 25% of the unpaid tax.
- Minimum penalty – For returns filed more than 60 days late, the minimum penalty is the smaller of 100% of the unpaid tax or $485 (for tax year 2024).
Exceptions and Reductions To Pay Taxes
While understanding the core penalty structure is crucial, navigating the exceptions and potential reductions can significantly affect your C Corporation’s financial impact.
Moreover, facing a penalty can feel daunting, but the IRS recognizes unforeseen circumstances beyond your control. If you can demonstrate the reasonable cause for late filing, it can lead to a full or partial penalty waiver. Acceptable justifications include:
Any Natural Disaster – Fire, flood, or other natural disasters that significantly impacted your ability to file on time.
The Death Or Serious Illness – Loss of key personnel responsible for tax filing due to unexpected illness or death.
Computer Failures Or Theft – System outages or data breaches hindering access to necessary information.
Miscommunication Or Reliance On Professional Advice – Incorrect information received from trusted professionals, leading to confusion about deadlines.
Failure to Pay Penalty
The IRS also applies a failure to pay penalty on the taxes owed if the taxpayer fails to pay anything on time. Note that this does not apply to filing an extension. A failure to pay penalty is ½ of 1% of the unpaid taxes for each month the tax due remains unpaid. Alternatively, the taxpayer can pay 90% of the due amount by the deadline. In this case, they will not have to pay a failure to pay penalty if they pay the remaining 10% by the extension date.
In cases where both penalties apply, the maximum combined penalties are 25% for the first 5 months. The IRS can wave penalties if the taxpayers can show reasonable cause for failing to file or pay on time.
Alternative Options To Pay Taxes
To avoid the failure to pay a penalty, you can opt for a partial payment approach. Alternatively, the taxpayer can pay 90% of the due amount by the deadline. In this case, they will not have to pay a failure to pay penalty if they pay the remaining 10% by the extension date.
Combined Penalties and Maximum Limits
In cases where both the failure to file and failure to pay penalties apply, the combined maximum penalty is capped at 25% for the first five months of delinquency. This means the penalties won’t continue to increase indefinitely after that period.
Penalty Abatement
The IRS may consider waiving or reducing penalties if you have a valid reason for your late payment. Acceptable justifications include financial hardship, unforeseen circumstances, or reliance on incorrect professional advice. Remember, strong documentation is crucial to supporting your claim.
Seeking Professional Guidance
Tax regulations and penalties can be complex. Consulting a qualified tax expert can be incredibly helpful. They can assess your specific situation, identify potential penalty reduction options, and guide you through the process of requesting penalty abatement from the IRS. Their expertise can save you time, effort, and potentially significant financial penalties.
Pay Taxes Beyond Penalties
Aside from penalties, taxpayers who owe taxes will also have to pay interest on the amount of tax due. Interest accrues from the original due date of the return through the date the owner pays. Interest also varies depending on the nature of the tax due.
Generally, corporations make estimated tax payments if they expect their tax liability for a certain tax period to be more than $500. Failure to make estimated payments when due can result in an underpayment penalty. Underpayment penalties are computed using Form 2220, Underpayment of Estimated Tax by Corporations.
Corporations that are at least 25% foreign-owned should report related party transactions between such corporations and their foreign shareholders. Failure to comply with this reporting requirement means an automatic penalty of $10,000.
Can Cleer Tax Help Me Pay Taxes on Time?
Absolutely! At Cleer Tax, our dedicated team is committed to addressing your business’s distinct requirements. We provide comprehensive tax advisory services tailored to your specific needs, covering every aspect of compliance and optimization—including helping you pay taxes in a timely manner. Our goal is to ensure that you capitalize on every available opportunity, leaving no stone unturned when maximizing your tax benefits and minimizing any potential liabilities.
Cleer’s Corporate Income Tax Packages encompass federal and state income tax filings for a hassle-free experience. We also offer all-inclusive bookkeeping packages, which include your monthly statements plus your federal and state tax returns.
If you have any questions about your business’s specific filing requirements, schedule a consultation to discuss them further. If you have further questions or need assistance, feel free to contact us.
