Aside from compliance, one of the main reasons why taxpayers should file and pay taxes on time is to avoid interests 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. Otherwise, they can incur penalties and interest. The IRS charges different types of penalties and interests depending on the nature of noncompliance.
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.
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, 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 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.
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 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 underpayment penalty. Underpayment penalties are computed using Form 2220, Underpayment of Estimated Tax by Corporations.
Corporations which are at least 25% foreign owned should report related party transactions between such corporation and its foreign shareholder. Failure to comply with this reporting requirement means an automatic penalty of $10,000.