Sound strange? Well, the IRS probably collects more money in late filing penalties than they do from taxes from early-stage companies.
To illustrate, let’s say that you and your roommate—who just so happens to be a Canadian citizen—incorporate a small business and each own 50 percent. You have some sales and expenses, but realize the business is a no-go. So, you close the business bank account and distribute the remaining cash amongst yourselves. You then do not file a corporate tax return, because you do not know one is required.
Congratulations. You have hit the jackpot! In addition to a bunch of late-filing penalties, you now owe the IRS $60,000. The culprit is the distribution to your roommate. For most IRS forms that report any foreign transaction, there is a $10,000 late filing penalty, plus an additional $10,000 per month penalty if it is filed 90 days late, up to $60,000.
The crazy thing is that you probably owe no income taxes. The $60,000 is just a penalty for not filing an “information only” form.
Here are the most common IRS and Massachusetts filings, and some of the consequences for late filing:
LLC Income Tax (Single Member), Due April 15
This one is somewhat easy—you just need to include a Schedule C (Profit and Loss from Business) with your personal federal and state income tax return. IRS late filing consequences are penalty and interest based on your total tax liability, from all sources.
LLC Income Tax (Multi-Member), Due April 15
Entrepreneurs need to file a partnership return (Federal Form 1065 and MA Form 3) and distribute K-1 forms to the members. These forms are not intuitive. The IRS late filing consequence is $195 per month per member penalty.
S Corporation Income Tax, Due March 15
Entrepreneurs also need to file a corporate tax return (Federal Form 1120S and MA Form 355S) and distribute K-1 forms to the shareholders. These forms are not intuitive. The IRS late filing consequence is $195 per month per shareholder penalty.
C Corporation Income Tax, Due March 15
That’s not the only corporate tax return, however. You need to file a Federal Form 1120 and MA Form 355, as well. These forms are not intuitive. The IRS late filing consequences are penalty and interest based on your total tax liability.
Form 1099-MISC, Due to the Recipient on January 31 and to the IRS and Mass. on February 28
All businesses need to distribute Form 1099-MISC to any independent contractors or attorneys that were paid $600 or more in 2012. IRS penalty for noncompliance is $100 per form or $250 per form for “intentional disregard.”
This only covers the very basics. There are many moving parts to tax compliance and a quick call to your accountant can save you a ton of money and headaches.
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