Running a business isn’t easy. One of the biggest challenges businesses face is managing their expenses, including tax liabilities. Part of the process of handling a business’s tax obligations is the preparation and filing of a business tax return. But what happens if a business doesn’t file a tax return on time or makes a mistake on the return? And should it even matter if the business doesn’t owe any taxes?
In this month’s blog post we’ll answer those questions and touch on some other issues that relate to the filing of business tax returns.
Making a Mistake on a Business Return
The American tax code is complicated. So the IRS understands that honest mistakes can happen when someone prepares a business tax return.
In these situations, the IRS will not prosecute the business for the flawed tax return, but they will expect the business to pay what it owes. On top of that, the IRS may assess a 20% penalty on the amount the business underpaid the IRS.
But if the incorrect information on a business’s tax return was put there intentionally, then we’re potentially looking at tax fraud and the IRS may not be so forgiving.
Filing a Fraudulent Business Tax Return
Tax fraud requires intentional wrongdoing by the taxpayer. For a business to be guilty of filing a fraudulent tax return, there must be:
- Fraudulent intent; and
- A tax bill owed to the IRS.
Common examples of tax fraud can include:
- Falsified documentation
- Underreporting of income
- Claiming a deduction the taxpayer knows doesn’t apply to them
- Intentionally refused to pay a tax debt
- Purposely avoiding the filing of a tax return
Penalties for tax fraud can include civil and/or criminal sanctions. Civil penalties are typically limited to fines, while criminal penalties can include not just fines, but also possible jail time.
Not Filing a Business Tax Return
Most businesses, regardless of if they owe taxes, should file tax returns. If the business does not owe any taxes for a given tax year, there may be no direct penalty for failing to file, as any applicable IRS penalties usually come as a percentage of any underlying tax obligation. However, there are several reasons why businesses should still file their tax returns each year.
First, it may expose the business to a tax audit any time in the future. The typical three-year statute of limitations deadline for audits doesn’t apply until after the business return gets filed. If no return gets filed then the IRS can theoretically audit the business for that tax year whenever it wants.
Second, if it turns out that the business was wrong and that it did owe taxes, now the business faces late-filing and late-payment penalties. These penalties may come from not just the IRS, but from state tax authorities, too. For instance, California’s Franchise Tax Board will charge a 5% penalty on the unpaid taxes plus 0.5% for each month it remains unpaid.
Third, the business can’t take full advantage of net operating losses. Normally, any net operating losses (deductions that exceed income in a tax year) can offset business income in a future year. But the coronavirus changed that.
With the Coronavirus Aid, Relief, and Economic Security (CARES) Act, net operating losses can now be used by businesses to offset income from prior years. Specifically, a business can carry back net operating losses from 2018, 2019 and 2020 up to five years.
The CARES Act also included provisions that allow businesses to change how they depreciate certain assets, such as accelerated depreciation for certain types of business property. Not filing a business return means not being able to take advantage of these coronavirus-related tax benefits.
Filing a Business Tax Return Late
If a business files its return after the due date, then the business can expect to pay late-filing and late-payment penalties. Depending on how much the business owed, there could be interest accrued on the unpaid tax amounts.
Businesses have every reason to file their tax returns and do so on time. Even if they don’t risk civil or criminal penalties, they risk losing out on tax benefits that can help their business save a lot of money.