The IRS Doesn’t Send Thank-You Notes—Just Penalty Notices

You filed a little late.

You fail to meet a projected payment.

You recruit a remote employee from another state but fail to register for payroll taxes there.

Not a big thing, right?

The IRS and state agencies believe otherwise.

They don't send polite reminders; instead, they send bills with penalties and interest that accrue daily.

Penalties are the silent budget killer for many small business owners and self-employed taxpayers: they sneak up

on you and eat away at your cash flow when you least expect it.

The Penalties That Hurt the Most

The following are the most prevalent ones we observe each year:

• Late filing penalties: If you miss a filing deadline by even one day, the IRS may penalize you 5% of the unpaid tax every month, up to 25%.
• Late payment penalties: Filed on time but paid late?  That's an additional 0.5% per month until it's paid in full.
• Underpayment of projected taxes: If you're self-employed or have changing income and don't pay enough quarterly, you'll face penalties, even if you pay everything by the end of the year.
• Payroll tax penalties are the most dangerous.  Missing deposits or filing issues with employees can result in cascading IRS and state penalties.  Withheld taxes are treated as trust funds by the government, meaning you are holding money for them.
• State nexus issues: Hire a remote worker or expand into a new state?  Congratulations; you may now owe payroll or sales tax filings there as well.  Ignore it, and you'll face penalties before you know it.
  

The Ripple Effect of Penalties

A single missing file not only costs money, but also has a domino effect.
One tiny infraction can result in interest, withheld refunds, and letters that take months to resolve.  For business owners, it can even derail financing or cause problems when selling the enterprise.

And, because most penalties compound regularly, delaying their resolution simply makes matters worse.

How to Stay Out of Penalty Trouble

Here's what distinguishes people who avoid penalties from those who don't:

• System, not memory. Automate filing reminders and payments; never rely on remembering.
• Make an estimate, not a guess. Work with a tax specialist to appropriately compute quarterly payments.
• Centralize payroll compliance. If you've gone remote, ensure that your payroll provider (or advisor) is registered in each state where your workforce works.
• Respond to notices quickly. The longer they remain unopened, the more difficult they are to repair.

Penalties are avoidable—but only if you have mechanisms in place before something goes wrong.

Bottom Line

Tax and payroll penalties are similar to leaks in your financial roof: they may appear little at first, but if ignored, they can quickly become costly.

If you have gotten a notice or just want to prevent one, contact our office right once.  We can help you identify hazards, address existing penalties, and create a system to prevent them from recurring.