S-Corporation Filing Penalties
Today is September 15th, the due date for extended 1120, 1120s and 1065 returns. This is always a busy and sometimes rather stressful day at my office. It shouldn’t be that way, but the stress level is high because we file a lot of S-Corp taxes and, well, the tax laws regarding late penalties for S-Corps are just plain unfair. Keep in mind that an S-Corp pays ZERO income tax, thus, there is no way the IRS can charge interest on a past due return. Instead they charge $195 PER MONTH for EACH SHAREHOLDER of the S-Corp. That’s just crazy! An S-Corp can have up to 100 shareholders so lets think abou this. If an S-corp with 100 shareholders accidentally files late, just because someone forgot to push a button, they get hit with a late filing penalty of $19,500 per month or part of a month (in other words ONE day late). If they completely forget for a year, they could owe $234,000 in penalties, plus interest on the penalties.
Now compare that to a C-Corp which pays a 5% interest late filing penalty per month on the actual income tax that is due, up to a maximum of 25%! In other words, a large corporation that owes $100,000 in taxes could file their return a year late and pay a $25,000 late penalty, but an S-Corp with NO TAX DUE could owe up to $234,000 in late penalties. Who wrote this tax law?