If you’re self-employed or own a small business, you need to know a lot about taxation. Here are the six most common IRS penalties that small business owners have to watch out for.

• Underpayment of estimated taxes: This penalty is charged if you have significant income that’s not subject to income tax withholding. In general, if you don’t pay at least 90 per cent of your annual tax bill through withholding, then you have to pay estimated tax. You do this by sending equal quarterly installments to the IRS.
• Failure to file penalty/late filing penalty: This penalty is charged if you fail to file your return by the due date. Even if you are unable to pay your taxes, you should file your return because the penalties for late payments are much less than for not filing.
• Failure to pay penalty/late payment penalty: If you don’t pay your taxes on time, then this penalty is charged at the rate of 5% a month on the outstanding tax.
• Accuracy related penalty: In case there are errors your tax return that are detected after an audit then you would be charged a 20% penalty.
• Tax fraud penalty: This is charged if it is detected that you purposely under-reported your income or filed your taxes with the intent to commit fraud. You would be charged a 75% tax fraud penalty on the underpaid amount.
• Trust Fund Recovery Penalty (TFRP) – This penalty applies if you own a business with employees, and you’re required to withhold income and employment tax from their paychecks. Failure to send this money to the IRS results in a 100% penalty.

You can easily avoid these IRS penalties if you know the rules. Consult your tax advisor for a detailed understanding of the taxation laws and how to file your tax returns properly.

Mark S. Eghrari & Associates, PLLC is a member of the American Academy of Estate Planning Attorneys.

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