Corporate Tax Penalties – The Five Main Types

If you own or run a business, you have likely had to deal with the hassle of keeping your own books and records, either by doing the work yourself, or hiring an employee to do it for you. Unfortunately, given the complexity of the tax world, this can leave many business owners unknowingly liable for severe tax penalties, if the work of their accounting isn’t up to the standards of the IRS. They, along with the Department of the Treasury, have established five broad categories of tax penalties that businesses can be liable for if they do not protect themselves properly. They are:

• Negligence – A business is guilty of negligence regarding tax law if they do not exert reasonable effort attempting to comply with that law. Penalties begin at 20%.

• Understatement – If you are caught under-reporting your income (more than $10,000 worth), you are going to be liable for this type of tax penalty. Penalties begin at 20% again.

• Misstatement of property value – When actual valuation on sale of a piece of property ends up being grossly disproportionate to the tax burden of the property, the business is guilty of misstating the true value of the property for tax purposes. Another 20% penalty.

• Substantial & Gross Excess – When a violation is particularly egregious, the offending company can be hit with either a ‘substantial’ or a ‘gross’ designation regarding their violation. These thresholds are 200% and 400% respectively. Substantial violations carry a 20% penalty, while gross ones carry 40%.

• Fraudulent Activity – If the business is shown to have engaged in fraudulent activity, actively or passively, penalties begin at 75% and climb rapidly.

As you can see, these penalties are substantial, and can begin to add up extremely quickly, should a company find themselves unfortunate enough to ever face dual violations. It usually only takes a company one instance of having to deal with the IRS before they realize that it makes sense to consider outsourced accounting services instead, strictly from a liability standpoint if nothing else. Experienced, professional, competent outsourced accountants can take all of these risks away from you, and likely do it for a lower cost than your own in-house employees to boot.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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