Have you ever received a letter from the IRS and wondered, “What exactly is this about?”
That is how most small business owners find out about penalties. No phone call. No warning. Just a friendly little letter that says: “Oops. That’ll be $560.”
The IRS penalty system is like a leaky faucet. One drip at a time doesn’t seem like much… until your whole budget is soaked.
Top IRS Penalties Explained (and How to Avoid Costly Fees Before They Add Up)
1. Late Filing Penalty
Didn’t get your return in on time?
The IRS charges 5% of what you owe, every month you are late. It caps at 25%, but that can snowball fast, especially if you’re also behind on paying.
How to avoid it:
File on time, even if you cannot pay yet. The penalty for not filing is worse than the one for late payment.
2. Late Payment Penalty
Filed your taxes but could not pay the full amount?
That will cost you 0.5% per month on the unpaid balance, until you hit 25%. It starts small, but quietly chips away at your cash until you notice the dent.
How to avoid it:
Set up a payment plan. The IRS would rather get paid slowly than not at all.
3. Accuracy Penalty
Made a mistake? Forgot to report some income? Claimed a deduction you should not have?
The IRS calls that negligence and charges 20% of the underpaid amount.
How to avoid it:
Stop guessing. Whether you are using QuickBooks or just hoping your numbers are close enough, let someone else take a second look before you hit submit.
4. Estimated Tax Penalty
Self-employed or running a business? You are probably supposed to pay taxes quarterly, not just in April.
If you don’t, you may get dinged with an Estimated Tax Penalty, especially if you owe more than $1,000 when you finally file.
How to avoid it:
Talk to your bookkeeper or accountant about quarterly payments. It is less painful than writing one big check and getting penalized for being late.
5. Late 1099s or W-2s
Forget to send a 1099 to your contractor? Missed the W-2 deadline for your employee?
That’s $60 to $310 per form, depending on how late you are. And yes, the IRS charges per form. Not per business.
How to avoid it:
Track your filing deadlines, or better yet, delegate that job to someone who tracks it for a living.
If You Remember One Thing, Make It This:
The IRS penalty system is not aggressive. It is relentless.
You will not get hit with a $10,000 fee overnight. But you will pay hundreds, or thousands, over time if these things are not handled.
At Solution 8020, we help growth-minded businesses stay penalty-proof with:
- Monthly bookkeeping
- Ongoing tax planning
- Year-round tax prep
Because when you are focused on running a business, you should not also be worrying about letters from the IRS.
Ready to plug the leaks before they start?
Pick a time that works for you. We will help you make sure the IRS does not get more than they deserve.
