Tax penalty—something no business owner wants to hear. We know that paying taxes isn’t at the top of everyone’s favorite things list, but paying an unexpected IRS penalty can be the WORST–and can cost hundreds if not thousands of dollars.
Did you know there are legal ways to get out of paying IRS penalties?! Not everyone will qualify, but it is worth exploring these options of getting your penalties forgiven. We always recommend using a CPA for best results— but you can also try on your own.
Here are several common penalties small business owners face, and the steps you can take to try and reduce or remove those penalties.
Late Payment or Filing Penalty
This is the most common penalty people face is for filing and/or paying their tax returns late. The IRS charges 5% of the tax owed for every month the return is late up to a max of 25% for filing late. This can add up VERY quickly. If you owe money on your taxes and your payment is late, you can expect a 0.5% fee on the unpaid taxes, again up to 25% of taxes owed. Both late payment and late filing are things we encourage you to avoid at all costs because it can really hurt your wallet.
The best way to avoid a penalty is to file for an extension. If you file an extension you allow yourself additional time to get your tax return ready. Make sure you file for an extension before tax day using Form 4858 if you’re filing as a sole proprietor or Form 7004 if you’re operating as a partnership or corporation. This solution will give you a few extra weeks to get your affairs in order BUT you’ll still need to pay what you expect your tax to be by tax day.
What happens if I didn’t file an extension and got hit with a late filing or payment fee?
Is this your first time filing or paying late?
If yes, you are likely to be able to get off easy! Yay! Please keep in mind you must be totally penalty-free for the past three years (excluding the estimated tax penalty). When you call the IRS, ask the representative for “first-time penalty abatement.” There used to be a rule that allowed you to do this every three years—unfortunately, they removed this rule.
Sometimes you can’t get rid of the penalty entirely but reducing your tax load could at least lower the penalty. Make sure to double check your return to ensure you’re only paying what you truly owe.
What if I forgot to pay proper estimated taxes?
This happens more than you think. Many small business owners and those who file 1099s— forget to pay estimated taxes throughout the year. The government considers this late since they didn’t have their money when they were expecting it. The penalty is calculated based off the interest rate and how late your taxes are.
Your best bet is to avoid these penalties by remembering to pay estimated taxes every quarter. Set reminders on your phone or work with a CPA to ensure you are not forgetting. You can increase your contributions from a W2 job (if you have one) to cover the taxes you’ll owe from side income.
If the reason you didn’t pay your estimated taxes is because you “just forgot”, the IRS doesn’t care and you would need to pay up.
If you didn’t pay because of casualty, disaster, or another unusual circumstance—you can potentially remove the penalty. If you haven’t filed yet, include Form 2210 with your tax return and an explanation of your missed payments. You need documentation to support your statement in order to request a waiver for the penalty. If you have already filed, use Form 843 with included explanation and documentation requesting the penalty be removed.
What if I owe the ACA Health Insurance Mandate Penalty?
Unfortunately the removal of the penalty for not having proper health insurance came into effect for the 2019 tax year–which is filed in 2020. You could face some penalties for previous years if you do not have health insurance coverage— which can add up to $695 or more. It’s wise to note that starting in 2020 some States now have an ACA Health Insurance Mandate Penalty, so be sure to check with your state.
The potentially good news is that there are some exemptions to get out of this penalty. To see if you qualify for one of the exemptions click here. These exemptions include things like certain hardships, not being able to afford healthcare, having only a short gap in coverage or living abroad.
If you can prove you qualified for an exemption—even if you didn’t apply for an exemption for the entire year, you can at least reduce your penalty. Make sure to use Form 8695 when you file your return for these exemptions.
Things to keep in mind:
- never use an excuse like you forgot or didn’t know about the law—it won’t help you out.
- do not blame your tax preparer (although they might be able to help you figure out how to reduce or remove it!). If the IRS made a mistake that led to your penalty, however, you should not have to pay it.
- if your request to remove a penalty is rejected, you can appeal it. The IRS has a tool to guide you through this process.
- The IRS is very hard to get on the phone—using a CPA is much easier.
- Before automatically paying for a penalty, explore if there are ways to remove or reduce it.