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Five of the Most Common Small Business IRS Tax Penalties and How to Avoid Them

Small business tax penalties happen for mostly avoidable reasons. Learn what these mistakes are so you can save thousands of dollars in penalties and keep that money in your business's pocket.
tax penalties

Most of the IRS tax penalties small businesses face are avoidable. However, if you are not careful and miss a deadline, you could pay a significant fine. Since most small businesses prefer to keep those extra dollars in their bank account, it helps to know what the most common penalties are and how to prevent them.

Common IRS Tax Penalties

1.    Inaccurate Returns – An inaccurate return could cost you significantly. In some situations, small businesses must take a 20 percent hit if they are found negligent in reporting any of their income. The most common reason for such mistakes is not math errors, but the inability to validate a deduction the business is taking during an audit. In other cases, it could be due to failure to report all of the income the business earns.

How do you avoid this? Consult with your accountant to handle any returns and for accounting measures to be backed up.

2.    Failing to Make a Tax Payment on Time – A penalty of 0.5 to 1 percent applies each month that a tax bill is not paid on time. The IRS will simply add this to your bill if you fail to make payment when submitting your return. On the other hand, failing to make payroll deposits on time will cost you much more.

Avoid filing payroll taxes late by marking your calendar long before the due date rolls around. Learn how to avoid common payroll tax mistakes.

3.    Civil Fraud Penalties – A huge mistake a small business can make is to underreport income with fraudulent intent. When the IRS believes you purposefully tried to hide your income, you’ll be fined as much as 75 percent of the amount you failed to report. You could also be charged with criminal tax fraud.

The best solution for avoiding these penalties is to ensure income documentation accuracy. Having an accounting service that handles this throughout the year can help reduce the chances of missing income sources.

4.    Making Deduction Mistakes – Keeping records is essential. It will help you avoid spending countless dollars on penalties for making deduction claims you can’t back up. For instance, one of the most common mistakes involves vehicle mileage. You may be forced to provide a detailed journal outlining all of your mileage uses if you are audited. Plus, if you cannot prove it, you could be assessed a 25 percent penalty.

Documentation and backup is critical to avoid penalties. Ensure records are kept up-to-date to prevent making deduction mistakes.

5.    Charity Donation Mistakes – If you donate to a charity, you’ll need to have an accurate list of what you’ve donated and its value (if it is not cash). You’ll also need a receipt from the location — and the charity itself should be a reputable one recognized by the IRS. Not doing so could mean a 25 percent penalty.

The solution? Verify information long before you submit your return.

Avoiding these small business tax return penalties is possible. Start by hiring the right professionals to handle your reporting. Be honest and keep detailed records if you plan to make claims on your tax returns. Most importunately, don’t try to hide anything from the IRS. An audit has caused many small businesses to close their doors because of unreported income or high penalties for fraud.

For more information on common IRS penalties and fees, visit

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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