Business Failure to File/Pay Penalties

Substitute for Return

The IRS may prepare a return for a taxpayer if the IRS determines that the taxpayer was responsible for filing a return but failed to do so after receiving a notice from the Service.

Excise and Employment Tax Returns

Both annual and quarterly excise and employment tax returns are subject to the failure to file/failure to pay penalties.

Frivolous Returns

A frivolous return that is subject to the failure to file or pay penalties does not constitute a return and penalties may be asserted.

Extensions of Time to Pay Tax

Generally, if a taxpayer can show undue hardship the IRS will grant an extension of time to pay.  This extension normally cannot exceed 180 days and during this time no failure to pay penalties will apply. 

Carrybacks and Carry forwards

The IRS will not adjust the failure to pay penalty due to a carryback from a subsequent tax year.  These carrybacks include net operating losses, capital losses (corporations), foreign tax credits, and investment credits.

Erroneous Refunds

The IRS never asserts a failure to pay penalty to a refund erroneously distributed to the taxpayer.

Amended Returns

The failure to pay penalty applies 21 days (10 days for amounts that equal or exceed $100,000) from the date of assessment (sometime after the amended return is filed).

Corporate Short Years

For a corporation that dissolves before its fiscal year end, the failure to file and pay penalties begin to apply on the 15th day after the third month from dissolution.  For a corporation that is formed during a short year, they are required to file on the 15th day after the third month from when the short period ends.

Minimum failure to File Penalty

The minimum failure to file penalty is $100.

Fraudulent Failure to File

This penalty applies at the rate of 15% per month to a maximum of 75%.  This penalty is the counterpart to the civil fraud penalty and is usually assessed at the same time.  For this penalty to apply the Government needs to show that there is a net amount due that is derived from the willful and knowing intent to defraud.

Installment Agreements with Penalties

If there is an installment agreement in effect, the IRS will reduce the failure to pay penalty to ¼ of a percent per month.  If the taxpayer misses an installment payment the IRS will immediately send out a notice of intent to levy, however, the ¼ percent stays in effect until the IRS terminates the installment agreement.

Failure to File a Partnership Return

The failure to file a partnership return generally applies when a partnership fails to file a return (Form 1065).  Although it is the partnership that is assessed, it is each and every partner who is liable for the assessment.  Each partner is liable in the same manner that they are liable for partnership debts.

Partnerships with over 100 Partners

Each partnership with over 100 partners must file their return electronically.  Failure to file the return electronically results in a penalty of $50 per partner. This penalty should not be assessed if the partnership can demonstrate that failure to file was due to reasonable cause and not wilful neglect.  This penalty also does not apply if the partnership has 10 or fewer partners and the partnership did not file a form 8893 (Election of Partnership Level Tax Treatment).

Partnership Audits

When a partner in a partnership receives an audit adjustment through the partnership, the failure to file penalty applies on the amount of tax that should have been shown on the return.  This penalty does not follow deficiency procedures and the amount is directly assessed.

Penalty Rate for Failure to File Partnership Returns

The penalty applies at the rate of $195 per month for each partner, not to exceed 12 months.  For penalty calculation purposes, a person is considered a partner if they were a partner for any part of the tax year.

Incomplete Partnership Returns

If the partnership files an incomplete return, as a matter of general policy, the IRS will provide the taxpayer with thirty (30) days to file a complete return without incurring a penalty.

Failure to File an S-Corp Return

This penalty is imposed on S-Corporations that fail to file, or fail to timely file, an S-Corp return (Form 1120-S).  Each S-Corporation with more than 250 shareholders must file electronically.  If an S-Corporation with over 250 shareholders fails to file electronically the IRS will impose a penalty of $50 for each shareholder over the 250 threshold.  This penalty will not be imposed if the taxpayer can demonstrate reasonable cause.

Application of S-Corp Failure to File Penalty

The failure to file penalty for S-Corporations applies when the taxpayer failed to timely provide information required on Form 1120-S. The penalty applies to each month, or part month, for up to twelve (12) months at a rate of $89 per shareholder, per month.