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If you don't pay business taxes,
Uncle Sam will want to know why

July 29, 1999 -- Make no mistake about it, the IRS is serious about business owners paying their fair share in taxes. And it doesn't hesitate to use the possibility of penalties to substantiate this intent.

This tax tip sums up actions a business owner could take that would be likely to result in a penalty by the IRS. These actions tend to involve failing to file returns or pay taxes as required. In addition to the penalties detailed here, business owners should also be aware that the IRS does occasionally impose criminal penalties when it can prove that a business owner has intentionally failed to file a return, evaded taxes or made a false statement.

Failing to file tax returns
A business owner who doesn't file a tax return by the due date risks paying a penalty. Whatever tax is due on the due date will determine the amount of the penalty. Business owners should consult the instructions on their respective tax returns for more information.

Failing to pay taxes
A business owner who doesn't pay taxes by the due date has to pay a penalty for each month, or part of a month, that these taxes remain due. This penalty can't exceed 25 percent of the unpaid tax.

Failure to withhold, deposit or pay taxes
What happens when a business owner fails to withhold income, Social Security or Medicare taxes from employees, or withholds taxes but doesn't deposit them or pay them to the IRS? The IRS could penalize him for the unpaid tax, plus charge interest. Depositing the taxes late is another way to risk a penalty. For more information, see Publication 15.

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Failure to follow information reporting requirements
The following penalties apply to business owners who are required to file information returns. For more, see the Instructions for Forms 1099, 1098, 5498, and W-2G.

  • Failure to file information returns. Some business owners don't file their information returns properly. The IRS will penalize an owner who doesn't file information returns by the due date. Reporting incorrect information or omitting required information can also result in a penalty.
  • Failure to furnish correct payee statements. Under current IRS law, any business owner who withholds Federal income or Social Security taxes from their employees' wages must furnish a Form W-2 to each employee. The form states the names of the employer and employee; the amount of wages subject to income tax withholding and the amount withheld; the amount of FICA wages and FICA tax withheld; and the amount, if any, of advance payment of the earned income credit. Generally, business owners should furnish W-2 Forms for a calendar year no later than Jan. 31 of the following year.
  • If a business owner doesn't furnish a required statement to a payee by the required date, the IRS can penalize him. The IRS may also penalize businesses for furnishing forms that omit required information or report incorrect information.

Don't panic
What if a business owner knows he has made a tax mistake likely to result in a penalty? First, don't despair. The good news is that there are exceptions to these penalties. In fact, the IRS may waive them if the business owner can prove the mistakes resulted from a reasonable cause instead of willful neglect.

And, on a small number of information returns, correcting the errors by Aug. 1 of the year the returns are due will eliminate penalties for failing to include all the required information or for including incorrect information. What does the IRS consider small? The number of returns can't exceed the greater of 10 forms or .5 percent of the total number of returns the business owner is required to file for the year.

-- Posted July 29, 1999

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