One of the qualities that most describes the mindset of an entrepreneur is a solo focused vision, a desire to see things through directly. While that is a highly necessary aspect that shapes the personality of many a founder it can be a detriment in the critical area of dealing with tax preparation. There are many factors that go into reporting and filing, not the least of which is having it all done well and turned in on the exact right date, of which may change year to year. In fact, this year’s dates are different than the year previous so for the do it yourself type that means that there may be some late penalties coming.
Tax laws are always evolving, especially after a major political change such as a new president or other significant term changes, and guidelines as well as more importantly due dates can shift drastically. All those factors are why even if the prospect of long forms and itemizations don’t deter you from wanting to handle all aspects yourself or in house with your fellow partners it is highly recommended to use a professional dedicated service provider, such as Early Growth Financial Services for business tax compliance. One of the most sensitive issues that a dedicated professional is keenly aware of is due dates and how to handle any possibility or fall out in the event of missing them. Sometimes even when penalties have already been determined a skilled professional can help with mitigating the circumstances, especially for newly launched endeavors. Depending on the structure of your entity missing a due date can have mild to disastrous impacts on your startup’s finances.
The effect on your firm varies by firm type, outstanding taxes owed, as well as can be highly affected by if you have any foreign ownership involved. These factors can easily add penalties on top of any tax liability ranging from a couple hundred dollars monthly to an instant penalty of $10,000, all of which can result in bank assets being frozen and the fines being levied directly on your accounts by the IRS. To give an outline of what each scenario may look like we have the following breakdown:
LLCs & S Corps (Flow Through Entities)
Regardless of whether any tax is owed, or not, a monthly late penalty amount will be added for these structures. The current penalty is $195 assessed not only for each month but times the number of partners. To illustrate, a company with three partners filing two months late can expect a fine of $1170.
There are various penalties associated with C Corporations. While some founders take comfort that they are pre-revenue so how bad could the penalties be, there is a major concern to be aware of. In the case of any US company that has foreign ownership disclosure requirements, those that fail to make the appropriate disclosures may receive a $10,000 penalty assessed automatically if taxes are filed late or appropriate disclosures missed.
With any foreign ownership of a US entity there are special disclosures that need to be made, this is an area where the IRS is very strict and unforgiving.
What can be Done?
If you find yourself either having no choice but to file late, or if you already have and have had a penalty entered there are still possibilities regarding handling it and minimizing the downside. An abatement of the penalty can be sought, though it requires a substantial amount of correspondence with the IRS. It is not unusual for it to take several rounds even when being handled by a seasoned professional.
If even after several attempts with the agent assigned to the case results are not achieved there is the possibility to elevate it to a supervisor, this is a form of informal appeal. Beyond that would be escalating it further to a formal appellate hearing within the IRS.
This penalty does happen often for a first-year company unaware of the nuanced reporting requirements for foreign ownership. A word of caution though, the IRS does still handle much of its issues via snail mail so it is extremely critical, especially for those with multiple addresses, to have the most responsive and current address on the filing and any appeals. Missed mail notices can cause issues, especially to those used to most correspondence being digital.
As always, the best way to handle the issues is to plan proactively before they occur and work with solid professionals.