I’ve discussed this issue before in newsletters but wanted to remind taxpayers as filing season is upon us. Buried in the tax legislation passed in 2009 were increased penalties for S-corporation and partnerships that file their tax returns late. Many taxpayers were caught by surprise when their late 2009 returns generated penalties last year. In the past partnership, penalties were small, and S-corporations had no penalties at all.

Hang ‘Em High Boys

For 2010 returns, the penalties increase, and they are no longer trivial. Penalties for partnership and S-corporation late filing are now $195 per partner/shareholder per month up to $2,340! A small corporation with four shareholders could end up with a five-figure tax bill quickly. Worse, there are no specific provisions for penalty relief. The only way to abate the penalty is if the taxpayer can show “reasonable cause”, which is not simply “I forgot to finish it.”

In the past, since S-corporations rarely had income tax to pay, taxpayers would wait indefinitely to file the returns. No harm, no foul. Not so anymore. The penalties are part of the IRS strategy of penalties over the audit. Penalties are a whole lot cheaper to determine, and the taxpayer has a lot fewer options to remove them. An audit of a small corporation or partnership might take 100 IRS man hours, and generate the same amount as a penalty.

The simple solution is to file your corporate returns timely (or else).

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