Shutting Down a Business? File your Final Taxes On Time and Avoid the Short Year Trap

Filing a late partnership or S corporation tax return has gotten increasingly expensive over the last 10 years. In 2006, the penalty per month, per partner/shareholder was $50. For 2016 that penalty is $195 per month, per partner/shareholder. This means that if a partnership with two partners who fail to file an extension for their tax return, but still file by September 15th would face $1,950 in penalties from the IRS. The maximum months that penalties can be assessed are 12, but consider the client who may be a few years behind in filings and has multiple shareholders. These penalties can quickly reach the $10,000 plus mark.

If you are a business owner the above situation may not apply to you. You always file timely or get an extension and feel confident your tax professional filed your income tax returns when they said they did.  Yes, we have seen cases where the client believed the tax returns were filed when in fact they were not. Relying on a professional alone is not sufficient cause for the IRS to provide penalty relief. If you are someone out there dealing with penalty issues from the IRS there can be relief and we can help you reduce or alleviate those penalties. For the purposes of this blog, let’s assume all returns have been filed timely.

Where business owners can fall into what I will call the “short year trap” is when a change in ownership of the business occurs or the business is sold. The requirement to file a tax return is by the 15th of the 3rd month following the date the entity’s tax year ended for S Corporations and the 15th of the 4th month following the date the entity’s tax year ended for partnership. Notice that these instructions say the entity’s tax year ended – not the end of the calendar year. If you are a sole owner of a S corporation, sell your business, and shut down all entity operations on 7/15/2016 there is a tax return filing requirement before 3/15/2017. The same requirements apply with a technical termination of a partnership. If a sale of exchange of 50% or more of the ownership occurs in a 12 month period, that is a technical termination and a final tax return must be filed. That tax return is due before 4/15/2017 and late penalties will be assessed if not filed timely.

Contact Adam Shay CPA Firm in Wilmington NC for Help

Like with most tax returns, extensions are available, but you need to notify your CPA in Wilmington NC, at a minimum, when these events occur to help make sure you are in compliance and avoid late filing penalties. We want to be involved with and notified by our clients before these transactions happen to help walk them through the tax implications of selling a business, ending a partnership, or changing ownership. Even if the business no longer exists, the IRS may have the ability to reach individual assets to collect these penalties. Avoid falling into the short year trap by keeping communication open with your tax professional, Adam Shay CPA Wilmington NC.