Six IRS Form 1120-S Penalties You Need to Avoid

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As the weather outside warms up, you start thinking about tackling your business taxes. This is one set of paperwork you want to get right. With the constantly shifting laws and the sheer amount of information you need to know to properly fill out the forms, tax time can be daunting. If your company is set up as an S-corporation, there are different considerations and forms you need to fill out at tax time. One of the forms you need to complete is the IRS Form 1120-S.

In fact, you use this form to provide the bulk of your corporate information to the IRS, making it essential to fill it out properly. If you make a mistake, there are penalties involved. You don’t want to give the Internal Revenue Service (IRS) a reason to audit you. You don’t even want them to know your company name. There are six main IRS form 1120-S penalties.  

Who Needs to File an 1120-S Tax Form?

The IRS 1120-S form is a very specifically tailored tax form. It’s because you’re running the taxable income on your corporation through your individual tax return. Only corporations who have elected to become S-corporations need to file an 1120-S tax form. 

What is an S-Corporation?

So how do you know if your company is an S-corporation? What exactly is an S-corporation? In the simplest terms, an S-corporation is a business that acts as a corporation but is taxed on the individual owner’s tax form. You don’t report your income from an S-corporation in a business tax return, but with your individual tax return. 

This is called a “pass-through” taxing method and keeps you from paying tax twice on the same money. The tax owed on the corporation is passed through the owner’s individual tax return. For IRS purposes, there are some criteria you need to meet for an S-corporation, including:

  • The corporation must operate domestically
  • Restrictions on who can hold shares
    • Individuals, certain trusts, and estates can hold shares
    • Partnerships, corporations or non-resident aliens can’t hold shares
  • Can’t have more than 100 shareholders
  • You can only have one class of stocks
  • You can’t be an ineligible corporation, such as certain types of:
    • Financial institutions
    • Insurance companies
    • Domestic international sales corporations

Possible Form 1120-S Penalties

The IRS wants you to fill out all of your tax forms properly and wants to collect only the amount you owe in taxes. However, if there are mistakes — intentional and unintentional — there are penalties. Here are some form 1120-S penalties that you need to be aware of.

young businessman wearing glasses and blue shirt sitting at table with laptop working on tax forms

The Penalty of Filing Your Return Late

Most years, you have until April 15 to file your tax returns, and you can easily ask for and receive an extension. It makes sense with all the available time to file that the IRS would penalize corporations that file late. 

If you didn’t owe taxes, you’re charged $205 per month up to 12 months for each month the return is late. When you owe taxes, you pay the same amount as those that didn’t owe taxes, and you pay five percent interest each month on the taxes you owe the IRS to a ceiling of 25 percent. A return that’s less than 60 days past due pays the lesser amount between the taxes owed or $435. 

Trust Fund Recovery Penalty

This is a penalty for corporations that didn’t pay their excise, income, social security, and Medicare taxes. These are taxes that must be paid on behalf of employees. They are generally paid and filed on these forms:

  • Form 720, Quarterly Federal Excise Tax Return
  • Form 941, Employer’s Quarterly Federal Tax Return
  • Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
  • Form 944, Employer’s Annual Federal Tax Return
  • Form 945, Annual Return of Withheld Federal Income Tax. 

The IRS can charge anyone it sees as responsible for collecting, accounting for, or paying these taxes. It doesn’t matter who or why they decided to leave these taxes unpaid. You’ll be expected to pay the full amount of the trust fund taxes owed.

Interest on Unpaid Taxes

If you don’t pay the tax burden at the time you file your taxes even if you get a filing extension, you’ll be responsible for paying interest on the unpaid amount. IRS form 1120-S penalties are also charged interest when they go unpaid. It doesn’t matter where the penalty stems from; if you don’t pay it immediately, you’ll be charged interest on that amount. 

Information Not Provided in a Timely Manner

For each instance of your failure to provide a Schedule K-1 to a shareholder or for each instance that you fail to provide a Schedule K-1 to a shareholder with all the correct information, you’ll be charged a penalty. The penalty is $270 for each instance.

For example, if you have 10 shareholders, and you don’t send them their Schedule K-1, you’ll pay $270 times 10 instances for a total of $2,700. 

The penalty can increase to $550 per instance if the failure was intentional. Also, you can ask for a waiver of the fee if you have a good cause for not providing the Schedule K-1.

Paying Your Taxes Late

Sometimes, you don’t have the amount you owe when you file your taxes. You’ll pay a penalty of half of a percent to one percent each month for this tardiness. This percentage will continue each month until you reach 25 percent of the owed amount. If you have cause for not paying on time, you can request a waiver of the interest.

Other Penalties

The IRS can assign other form 1120-S penalties in cases of:

  • Negligence
  • Substantial understatement of tax
  • Reportable transaction understatements
  • Fraud

It’s up to the discretion of the IRS as to what these penalties involve. 

If you’re filing IRS Form 1120-S, you want to file it correctly and on time. When you need assistance, contact us to speak to a tax attorney who understands S-corporations. 

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