S-Corporation Filers “Beware the Ides of March”

S-Corporation filers “Beware the Ides of March”, or you could be crying in your beer come St Patrick’s Day, and lose a lot of green to boot.

Calendar year S-Corporation returns are due March 15^th.  Records not complete?  Then you need to file an automatic 6 month extension of time to file by this date.  What if you do not timely file or extend?  Most people think that because there is no tax due (S-Corporations are flow through entities and therefore any taxes due are at the individual shareholder level), then no penalties will be assessed to the S-Corporation. 

Wrong!  IRS changes enacted in 2010 increased the penalty for late filing of an S-Corporation return to $195 per month per shareholder for each month, or fraction thereof, that the return is late.  Check out the following example:

An S-corporation with a calendar-year end (Jan 1-Dec 31) is required to file the 1120S annual tax return on the 15th day of the third month following the close of the tax year—or March 15th of the following year. If the corporation has 3 shareholders, no extension of time to file was submitted and the return was filed on July 16th, the late filing penalty is calculated as follows:

Number of shareholders during the year = 3

Months late = 5 (March 16th – July 16th)
*if submitted on July 15th it’s only 4 months late

$195 penalty x (3 shareholders) x (5 months late) = $2,925
*or a whopping $585 per month

To add insult to injury, all penalties imposed by taxing agencies are non-deductible for income tax purposes, so you’re hit twice by the same penalty.  But you will be doing your part to reduce the federal deficit.  The IRS projects that this penalty will raise $587 million from 2011 to 2019.

While the IRS allows waiver of this penalty due to reasonable cause, they have been extremely strict in this area.  So maybe they will give you one pass with a good reason (no, my dog ate the tax return won’t work), don’t expect any relief the second time around.

We recommend that you electronically file any federal or state returns or extensions as this will give you electronic proof of timely compliance.  In fact guess what happens if you do not use electronic filing and payment means for Massachusetts?  That’s right.  A penalty of $100 per occurrence will be assessed.

So get your S-Corporation returns or extensions electronically filed by March 15^th so you can enjoy that green beer come March 17^th.  Hopefully the only penalty you will encounter is a little hangover.  But that one will go away.  The IRS and DOR?  Now that’s another story.

James A. Henderson, CPA

www.taxsense.com & www.ledgersense.com