Failure to file penalty
The failure to file penalty applies if the business doesn't file its tax return by the due date (including extensions).
Corporation - For a corporation filing Form 1120, the penalty is 5% of the tax due (less any tax paid on time and available credits) for each month or partial month the return is late. The penalty accrues up to a maximum of 25%. If the return is more than 60 days late, the penalty is the lesser of the minimum penalty for the year or 100% of the underpayment.
Partnership - For a partnership filing Form 1065, a penalty is assessed against the partnership if it's required to file a partnership return and it (a) fails to file the return by the due date, including extensions; or (b) files a return that fails to show all the information required. The failure to file penalty is charged for each month (or partial month) the failure continues, for up to 12 months. The penalty for each month is calculated by multiplying the applicable base penalty rate by the number of persons who were partners in the partnership at any time during the taxable year.
S Corporation - For an S corporation filing Form 1120-S, a penalty is assessed against the corporation if it (a) fails to file a return by the due date, including extensions; or (b) files a return that fails to show all the information required. The failure to file penalty is charged for each month (or partial month) the failure continues, for up to 12 months. The penalty for each month is calculated by multiplying the applicable base penalty rate by the number of persons who were shareholders in the corporation at any time during the taxable year.
Failure to pay penalty
The failure to pay penalty applies if the business doesn’t pay the tax when due. The failure to pay penalty calculation is based on how long the overdue taxes remain unpaid. Unpaid tax is the total tax required to be shown on the return minus amounts paid through withholding, estimated tax payments, and allowed refundable credits. The maximum failure to pay penalty is 25% of the unpaid taxes. Additionally, the IRS calculates the penalty based on both the failure to pay the amount of tax showing on the return and the failure to pay any tax not reported on the return.
Interest
Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment.
Penalty dispute and relief
If the business received a notice or letter, they should verify the information is correct. If the information is not correct, they should follow the instructions in the notice or letter to dispute the penalty.
The penalty may be removed or reduced if the business acted in good faith and can show reasonable cause for why it wasn't able to meet its tax obligations. (By law, interest cannot be removed unless the penalty is removed or reduced.)
Additional Information:
IRS: Form 843, Claim for Refund and Request for Abatement and instructions