Penalties & Interest for Taxes

This blog post is to inform you of Possible Penalties that may apply to your Taxes.

First, who are we talking about here?

Are you an individual researching for your own personal taxes (in the U.S.)?

Or are you a business owner or leader?

Taxes apply to us all - but differently, depending on the type of taxpayer. 

I'll address each type of taxpayer separately, though there are similarities between the penalties across taxpayer types. 

Click the links to skip to the taxpayer type you want to read about.

• Individuals
• LLCs
• S Corporations & Partnerships
• Corporations
• Trusts, Estates & Gifts
• Nonprofits / Tax-Exempt Entities

If you want to go back to the basics:

 - Personal Finance and Tax Basics

 - A Guide for Small Business Finance and Tax

 - How to Manage the Tax Calendar

But first, a note on

- Foreign Matters,

- Income Taxes are filed on an Annual Calendar Year Basis, and

- New FinCEN BOI Filing Requirements

Foreign Matters

For U.S. Income Taxes, the general rule for both Individuals, and corporations (not S-Corporations and Partnerships), is that if you don't have income, you don't have a filing requirement.

However, what's "classic" about tax law is "there is an exception to every rule."

If you have bank accounts, outside of the U.S., that at any time have a total balance of $10,000 or more, you have additional reporting requirements (outside of your income tax return), and you have some boxes to check and maybe some additional forms required with your regular Income Tax Return.

For businesses, there can be additional forms required with your income tax return for having a foreign owner or foreign operations. These additional forms that can be triggered due to international items have their own separate penalties, apart from the regular income tax return.

Please consider for yourself, or your business, if you have a Form 8938 or FBAR filing requirement.

If you'd like to talk more about your filing requirements, feel free to post a comment or reach out to me from my Contact Page.

For all taxpayers and most penalty calculations...

In general,

we assume we are filing a calendar year,

starting January 1 and expanding through December 31. 

The calendar year applies to individuals and other business entities and taxpayer types. Income tax will always report on an annual basis. Other types of taxes, like Sales, Payroll, or Excise, may have a more frequent filing and payment schedule. This blog post focuses on Income Tax.

All taxpayers, pending the IRS's approval, can elect to file their tax returns on a Fiscal Year, which just means the year period ends on a day other than December 31st. 

The tax deadline applies universally based on these assumptions. You will file the tax year tax return based on the year your annual period is starting and the due date is based on the date of your annual period's last date.

For example, April 15th is a major Tax Form deadline for Individuals and Corporations.

Let's say you have a business with a fiscal year ending September 30, who would otherwise file Form 1120 due April 15.

You would file a 2025 tax return for the annual period starting on October 1, 2025 and ending on September 30, 2026.

The tax return is then due 4 months and 15 days after the end of the year (the end of the year is September 30, 2026).

The 2025 tax return is due 4 months and 15 days after the last day of the year, which is a January 15, 2027 tax form filing due date (instead of April 15 for calendar year taxpayers).

For all businesses, especially small businesses...

New FinCEN BOI Annual Reporting Requirement - Penalties Apply!

Please note that there is a new filing requirement for businesses. It is not a tax form and it is not managed by the IRS. 

In 2021, Congress passed the Corporate Transparency Act, creating the new Beneficial Ownership Information (BOI) reporting requirement as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.

Quoting their website: 

The Federal Agency, Financial Crimes Enforcement Network (FinCEN), has the mission to...

" safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence."

FinCEN is also who FBARs are reported to. They launched the BOI E-Filing website for reporting beneficial ownership information (https://boiefiling.fincen.gov) on January 1, 2024.

• A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report.
• A reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective.
• A reporting company created or registered on or after January 1, 2025, will have 30 calendar days to file after receiving actual or public notice that its creation or registration is effective.

You should assume your business has a BOI Filing Requirement unless confirmed you qualify for an exemption.

You should not assume your CPA or "Tax person" is automatically doing this for you, because it is not a tax form.

For more information, visit FinCEN's FAQ Page.

This blog post is focusing on Annual Income Tax Matters,

not Employment, Sales Tax, or other Compliance Requirements and Taxes for Small Businesses.

This is not an exhaustive list of every single penalty that could apply, however it is comprehensive and covers the most applicable penalties. 

Please comment any questions you have. 

 ... now back to Income Taxes..

Individuals

Individuals must file Federal Form 1040 for their calendar year ending December 31st of each year, under the regulation of the Internal Revenue Service.

The form is due April 15 of the following year.

For example, 2025 Income Tax Returns are due April 15, 2026.

Individuals need to file tax returns when either:

• their income is higher than the current year's standard deduction, or
• they have net self-employment income of at least $400 (*as of 2024 tax law), or
• The IRS lists here other circumstances that may require you to file.

Standard Deduction

See Personal Finance and Tax Basics for more on Standard Deductions.

Every taxpayer gets a set amount, the Standard Deduction, to reduce their taxable income, before computing the tax rate applicable and taxes due.

The Standard Deduction is increased annually, set by the IRS. A simple google search will easily confirm the current year's amount. Depending on your tax filing status (Single, Married filing Jointly, Head of Household, Qualifying Widow/er or Married Filing Separately), the Standard Deduction amount will be different.

For 2024:

Penalties 

• Late Filing Penalty
  • You first need to determine if you have a filing requirement, as reviewed above, because if you do not have a filing requirement, you will not have a Late Filing Penalty.
    • If you do not have unpaid taxes (i.e. no taxes due), the Late Penalty may apply but will calculate to $0.
  • Tax Returns must be postmarked or e-filed by 11:59 PM on the tax form due date.
  • Extensions may be filed by the same due date, allowing for six more months to complete the submission of the tax return. Extensions only allow more time to file the tax return; extensions do not allow for more time to pay taxes due.
    • If extended tax returns are not filed within the six month timeframe, the tax return will be considered late.
  • If you are out of the country on the due date, you get an automatic 2 month extension to file your tax return and remit your tax payments, if due. 

• Late Filing Penalty Calculation
  • Late Penalty is based on your tax due. Therefore, if you do not have tax due, you cannot have a Late Filing Penalty Due.
    • This applies to general income tax reporting, not special filing circumstances (like foreign matters and more, mentioned above). 
  • The IRS will charge you 5% of the unpaid tax for each month, or partial month, the tax return is late.
  • Penalty will not exceed 25% of your unpaid tax.
  • Late Payment Penalty will also be triggered, calculated separately. Failure to Pay Penalty reduces the total Late Payment Penalty for every month both penalties apply, for a total of 5% per month.
  • Failure to File Penalty will stop at 5 months if your balance is still unpaid. The Failure to Pay Penalty will continue.
  • If a tax return is more than 60 days late, there is a minimum penalty amount of $485*, or the amount of the unpaid tax before penalties, whichever is less.
    • (*2023 tax returns and later, for minimum penalty)
  • If you file an extension, you have 6 months to file your tax return.
    • If the return is not filed before the extended due date, the return is considered late since April 15.
    • The extension is irrelevant unless you file within the six-month extended period.

• Late Payment Penalty
  • Payments are late for tax returns when they are submitted after April 15. 
    • In theory, you will make quarterly estimated tax payments throughout the year and then when you file your income tax return, there is no tax due, you've already prepaid your balance due.
      • Or, this is how withholdings work if you are a W2 employee.
      • Learn more about Quarterly Estimated Tax Payments. 

• Late Filing Penalty Calculation
  • Late payments incur a penalty of 0.5% of the unpaid tax, for each month, or part of a month, the tax remains unpaid.
  • You can request a reasonable cause exception for forgiveness of this penalty, which you would need to explain/show.
  • Penalty rate increases once the IRS issues a notice of intent to levy or seize property. 
    

Interest

• The IRS will charge interest, on a daily basis, on top of all penalties.
• Interest will continue to accrue on the increasing balance.
• The IRS does not offer favorable payment plans. Aim to pay your tax bills timely to avoid penalties and interest.
  
• Payment arrangements are available but again, do not provide favorable flexibility to payment financing costs.

State Level Taxes

All of the above rules discuss our Federal Tax Laws.

Depending on the State you live in, you will also have State and Local tax laws applicable to you.

Most states have an income tax that works similarly to the Federal Income Tax System. When this is true, the states late filing and late payment penalties and interest work in a similar fashion to the Federal rules explained above.

Comment on this post if you'd like to know about your State.

Why file anyways?

It is beneficial to file your tax return annually, even if it's not required.

Some reasons you might want to file your tax return, even if there are no penalties if you don't:

1. You have a refund waiting for you from withholdings,
2. You have credits available to you which could be paid out in cash,
3. You might need your tax return for non-tax purposes, like rental or loan agreements,
4. Filing your tax return closes the statute of limitations. 

LLCs

LLCs are a chameleon tax entity.

By default, if you are a Single-Member LLC, you are considered a "disregarded entity" and file your LLC activity on Schedule C of your Individual Income tax return, Form 1040, for Federal purposes, due April 15th, as detailed above.  For state purposes, it depends on the state. Usually there is a separate form to file for the LLC in your State.

By default, if you are a multi-member LLC (two or more members/owners), you will file a Partnership Income Tax Return, Form 1065, for Federal Purposes. Again, each state has different rules. Comment your questions below. See the next section for more information on Form 1065.

S Corporations & Partnerships

Both S Corporations and Partnerships have Tax Form due dates of March 15 and K-1 related penalties. 

S Corporations must file Form 1120-S, due March 15, or extended through September 15, for the previous year.

Partnerships and Multi-member LLCs must file Form 1065, due March 15, or extended through September 15, for the previous year.

For example, 2025 Income Tax Returns are due March 15, 2026.

Both S Corporations and Partnerships are considered "Flow-through" or "Pass-through" taxpayers because, in general on the Federal level, the business does not pay any tax (although some exceptions can apply). Instead, the income "passes-through" over to the owners, through the reporting on Form K-1.

The business will file either Form 1120-S, or Form 1065, almost as an informational exercise, to report the totals for the business. The Form K-1 will then tell each owner how much income, or loss and deductions, should be reported on their Individual Tax Return. The owners pay the tax for the business.

Learn more here: A Guide for Small Business Finance and Tax

S Corporations and Partnerships must always file their tax returns, regardless of income level.

Penalties 

• Late Filing Form K-1 Penalty
  • This penalty applies to both Form 1120-S and Form 1065. 
    • Late Filing Penalty Calculation
      • This penalty may apply to late or incomplete filed tax returns.
      • Penalty is $235 for each month, or part of a month, up to 12 months.
        
      • The penalty applies to each of the persons who are shareholders, or partners or members. This will equal the number of Form K-1s that are distributed with the tax return for that year.
  • This penalty applies to both Form 1120-S and Form 1065. 
    • Failure to furnish information timely 
      • This penalty applies for each Form K-1 that is not provided to a shareholder timely, with complete information. 
      • A penalty of $310 applies to each K-1.
        • If found failure to provide documents was intentionally disregarded, the $310 penalty increases to $630, or the higher of: 10% of the aggregate amount of items that should have been reported on the K-1.
        • They are not playing! Most penalty calculations at least allow for "the lessor of."
      • Reasonable cause exceptions can be requested and applied.
      • Additional details for Partnerships, only
        • The maximum penalty is based on the level of gross receipts reported by the business.
          • For entities with gross receipts over
            • $5,000,000 is $3,783,000; and
            • $1,261,000 for entities with gross receipts at or below $5,000,000. 

• Form 1120-S Related Penalties
  

^^ above listed penalties.

• • Late Filing Penalty
    
    • When there is tax due with the Form 1120-S (when exceptions apply), there is a penalty of 5% of the unpaid tax, per month, or part of a month, up to a maximum of 25% of the unpaid tax.
    • The minimum penalty, in 2024, for a tax return filed more than 60 days late is the smaller of the tax due or $485.
  • Late Payment Penalty of Tax
    • Penalty will be 0.5% of the unpaid tax per month, or part of a month, up to a maximum of 25% of the unpaid tax.
      • Reasonable cause exceptions may apply.
  • Interest
    • Interest is charged on top of any penalties that may apply, determined under Section 6621.
  • Other Penalties 
    • See Other Forms and Statements that may be Required, on the IRS's Form 1120-S instructions.
    • If a reportable transaction under Section 6011 applies, and the proper forms are not filed, penalties may apply in addition to other penalties like accuracy-related penalties under Section 6662A. See instructions for Form 8886 for more information.
      
    • Trust fund recovery penalty when certain payroll taxes are collected and not paid. See Form 720 instructions.
    • Other negligence, fraud, and substantial understatement of tax.
    • Estimated Tax Penalty may apply when tax is due.

• Form 1065 Related Penalties
  

^^ above listed penalties.

• Late Filing Penalty
  
  • Reference above, $235 per month. 
• Interest
  • Interest is charged on top of any penalties that may apply, determined under Section 6621.
• Form 8865 Filing Penalty
  
  • Various Categories may apply to you as a taxpayer, requiring the filing of Form 8865, "Return of U.S. Persons With Respect to Certain Foreign Partnerships."
    • Examples of who may need to file include:
      • A U.S. person who is a partner of a controlled foreign partnership (CFC).
      • A U.S. person who transfers property to a foreign partnership in exchange for partnership interest. 
      • A person who has control over a Foreign Partnership. 
        
      • A person who has reportable transaction with a Foreign Partnership. 
    • There is a penalty of $10,000 for failure to file this form, in whole or in part, when required.
    • If you are notified of this failure and fail to respond within 90 days, there is an additional $10,000 penalty, limited to a maximum of $50,000 for each failure. 
  • Failure to file can reduce the available amount of foreign taxes available for credit. 
  • Criminal penalties under 7203, 7203, and 7207 may apply for failure to file, or filing false or fraudulent information. 
• Other Penalties 
  • Willful neglect of Section 7519 for failure to properly report Section 444 elections.
  • See Other Forms and Statements that may be Required, on the IRS's Form 1065 instructions.
  • If a reportable transaction under Section 6011 applies, and the proper forms are not filed, penalties may apply in addition to other penalties like accuracy-related penalties under Section 6662A. See instructions for Form 8886 for more information.
    
  • Trust fund recovery penalty when certain payroll taxes are collected and not paid. See Form 720 instructions.
  • Other negligence, fraud, and substantial understatement of tax.
  • Estimated Tax Penalty may apply when tax is due.

State Level Taxes

All of the above rules discuss our Federal Tax Laws.

Depending on the State the business is domiciled in, you will also have State and Local tax laws applicable to you. 

The state in which you form the business does not automatically mean you have an Income tax reporting requirement there.

Most states have an income tax that works similarly to the Federal Income Tax System. When this is true, the states late filing and late payment penalties and interest work in a similar fashion to the Federal rules explained above.

Comment on this post if you'd like to know about your State.

Corporations

Corporations, sometimes referenced as C Corporations, have Tax Form due dates of April 15, for the previous year.

For example, 2025 Income Tax Returns are due March 15, 2026.

Corporations are a distinctly separate taxpayer, away from its shareholders. 

Corporations pay tax on their net taxable income, currently, at a flat rate of 21%.

Learn more here: A Guide for Small Business Finance and Tax

Penalties 

• Form 1120-S Related Penalties
  
  • Estimated Tax Penalty
    
    • If a corporation expects a tax liability of $500 or more, they must make advance estimated tax payments.
    • Failure to make the advance payments, or pay at least last year's tax in advance, whichever is less, the underpayment is subject to reporting on Form 2220.
      • Form 2220 calculates the penalties on a prorated basis throughout the year, as income is earned. 
      • The rate for underpayment of estimated tax is typically the federal short-term interest rate plus 3%, compounded daily.
  • Late Filing Penalty
    
    • The penalty is 5% of the unpaid tax, per month, or part of a month, up to a maximum of 25% of the unpaid tax.
    • The minimum penalty, in 2024, for a tax return filed more than 60 days late is the smaller of the tax due or $485.
  • Late Payment Penalty of Tax
    • Penalty will be 0.5% of the unpaid tax per month, or part of a month, up to a maximum of 25% of the unpaid tax.
      • Reasonable cause exceptions may apply.
  • Form 5472 Filing Penalty
    
    • If the corporation has a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, Form 5472 is required.
      
      • There is a penalty of $25,000 for failure to file this form, in whole or in part, when required.
      • If you are notified of this failure and fail to respond within 90 days, there is an additional $25,000 penalty.
    • These penalties occur for each related party that is required to be disclosed.
  • Form 5471 Filing Penalty
    
    • This form satisfies the requirements of Sections 6038 and 6046, to report U.S. persons who are officers, directors, or shareholders in certain foreign corporations. 
      
      • There is a penalty of $10,000 for failure to file this form, in whole or in part, when required.
      • If you are notified of this failure and fail to respond within 90 days, there is an additional $10,000 penalty, limited to a maximum of $50,000 for each failure. 
    • These penalties occur for each U.S. person that is required to be disclosed.
  • Interest
    • Interest is charged on top of any penalties that may apply, determined under Section 6621.
  • Other Penalties 
    • See Other Forms and Statements that may be Required, on the IRS's Form 1120 instructions.
    • If a reportable transaction under Section 6011 applies, and the proper forms are not filed, penalties may apply in addition to other penalties like accuracy-related penalties under Section 6662A. See instructions for Form 8886 for more information.
      • This also applies  to Form 8918, Material Advisor Disclosure Statement.
        
    • Trust fund recovery penalty when certain payroll taxes are collected and not paid. See Form 720 instructions.
      
    • Other negligence, fraud, and substantial understatement of tax.
      

State Level Taxes

All of the above rules discuss our Federal Tax Laws.

Depending on the State the business is domiciled in, you will also have State and Local tax laws applicable to you. 

The state in which you form the business does not automatically mean you have an Income tax reporting requirement there.

Most states have an income tax that works similarly to the Federal Income Tax System. When this is true, the states late filing and late payment penalties and interest work in a similar fashion to the Federal rules explained above.

Comment on this post if you'd like to know about your State.

Trusts, Estates & Gifts

• Trusts 
  
  • There are many types of trusts that may be have a Form 1041 filing requirement, due April 15, for the previous year.
    • Extensions are available for 6 months.
  • Late filing and late payment penalties apply, under Section 6651, similarly to the above reference penalties. 
    • Because Trusts are also "pass-through" entities and issue From K-1s to beneficiaries, the same K-1 penalty for $310 that applies to S Corporations, applies to Trust K-1s too.
  • See Form 1041 Instructions for more information, or comment below with your questions.
• Estates 
  
  • Estates file Form 706 within 9 months after the death of the decedent (the taxpayer owning the Estate). A six month extension is available.
  • Late filing and late payment penalties apply, under Section 6651, similarly to the above reference penalties. 
  • A 20% penalty applies when the underpayment of estate tax exceeds $5,000, when the understatement is from the valuation understatement.
  • See Form 706 Instructions for more information, or comment below with your questions.
    
• Gifts 
  
  • Taxable gifts are reported by the person giving the gift, the giftor. The Giftor pays the gift tax of Form 709, due April 15, for the previous year's gifts.
    • Extensions are available for 6 months.
  • A taxable gift is any amount given over the annual exclusion amount.
    • For 2024, the gift exclusion is $18,000 per giftee.
  • Late filing and late payment penalties apply, under Section 6651, similarly to the above reference penalties.
  • See Form 709 Instructions for more information, or comment below with your questions.

Nonprofits / Tax-Exempt Entities

Charities and other Tax-Exempt Organizations still have tax filing requirements and can have exceptions apply where tax may be due.

Form 990 is filed for Tax-Exempt Organizations, due May 15, for the previous calendar year. 6 month extensions are available for time to file your tax return.

Filing Requirements are contingent on the amount of gross receipts the business has collected in the relevant tax year.

Late Filing Penalties are also contingent on, and calculated based on, the amount of gross receipts the business has collected.

See IRS Form 990 Instructions for more information or comment your questions below. 

Remember, when looking for tax advice online, you need to consider your source.

The Internal Revenue Service is always the best place to source your information.

When in doubt, I'm here for you!

Rooting for you, 

💜 Coach Jacque

Want to talk about making better money choices? Hit me up! I'd be honored to speak with you.

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Tax Disclaimer:

The tax information provided on this website is for educational purposes only and should not be considered as professional advice. Tax laws can vary and change over time. For personalized tax advice or specific questions regarding your financial situation, please consult with a qualified tax professional or accountant.

At Balanced Practice, we offer qualified tax advice from Jacquelene Bishop, CPA and her managed team. We cannot guarantee advice unless we have entered into a signed engagement.

Remember, the content here is meant to inform and educate, but it's always best to seek personalized guidance from a professional who understands your unique circumstances.