Penalty for Failure to File Corporate Tax Return
If you do not file your corporate tax return, the IRS normally imposes a civil penalty. Once you file the return and pay the overdue taxes and related penalties, the matter is closed. However, if the corporate tax returns are not filed for several consecutive years, the IRS could look at it as a criminal matter. Filing your corporation’s tax returns on time, even if you cannot pay the taxes, can go a long way toward remaining on the civil side of the IRS house.
If your C corporation has not filed a tax return, a monthly 5 percent penalty is imposed on the unpaid tax amount until the tax return is filed. For example, if you have not filed for one month and owe $20,000 in taxes, multiply $20,000 by 5 percent to get the penalty amount of $1,000. If your return is not filed for more than 60 days, the minimum penalty is $135 or the unpaid tax amount, whichever is smaller. The maximum penalty the IRS can impose is 25 percent of the unpaid tax amount.
S corporations are penalized $195 a day for each day the return is not filed. You calculate the penalty by multiplying the daily $195 penalty by the number of days the return is unfiled multiplied by the number of corporate shareholders. For example, if the tax return is not filed for 40 days and you have four shareholders, multiply $195 by 40 days by four shareholders to get the $31,200 penalty amount.
If taxes are due, add in 5 percent of the unpaid tax amount for each month the return is not filed. For example, if your corporation’s tax is $5,000, multiple $5,000 by 5 percent to get $250. Add the $250 to the $31,200 penalty for a total of $31,450. The penalty is limited to 25 percent of the unpaid tax.
If you have a limited liability company that is classified as a partnership for taxation purposes, you must file Form 1065, the annual partnership return. For each month the return is not filed, the IRS imposes a monthly $195 penalty that is multiplied by the number of managing members. The maximum penalty is 12 months. For example, if your LLC has not filed its tax return for five months and has three managing members, calculate the penalty by multiplying $195 by five months multiplied by three managing members to get the total penalty of $2,925.
If you do not file corporate tax returns for several consecutive years, the IRS could decide the non-filing is a criminal action. The case will be referred to an IRS criminal investigator. The criminal investigator can refer the case to the Department of Justice for prosecution. Corporate owners and directors may be prosecuted for their role in failing to file the corporation’s tax returns.