The IRS imposes two separate penalties when you’re late: one for filing late and one for paying late. They run simultaneously, and interest accrues on top of both. The longer you wait, the more expensive it gets.

The failure-to-file penalty is 5% of the unpaid tax for each month or partial month the return is late, up to a maximum of 25%. The failure-to-pay penalty is 0.5% per month on the unpaid balance, also capped at 25%. When both apply in the same month, the failure-to-file penalty drops to 4.5% so the combined rate is 5% per month. But here’s the important part: if you file more than 60 days late, the minimum failure-to-file penalty is the lesser of $510 or 100% of the tax owed. Even a small tax bill can trigger a disproportionately large penalty.

The penalties differ by entity type. S-corporations and partnerships face a different structure entirely. Instead of a percentage of unpaid tax, the IRS charges a flat penalty per shareholder or partner per month. For 2024, that’s $240 per partner or shareholder per month, up to 12 months. A four-member LLC taxed as a partnership that files three months late owes $2,880 in penalties even if the entity itself owes zero tax. This catches a lot of business owners off guard.

Interest compounds daily on any unpaid balance and on accumulated penalties. The IRS adjusts the interest rate quarterly. It’s currently around 7-8%, which adds up fast on larger balances.

Filing an extension helps, but only partially. An extension gives you six extra months to file, but it does not extend the time to pay. You still need to estimate and pay what you owe by the original deadline. If you file an extension and pay on time, there’s no penalty at all. If you file an extension but don’t pay, the failure-to-pay penalty still runs from the original due date.

Tennessee doesn’t have a personal income tax, which simplifies things for sole proprietors. But LLCs, S-corps, and C-corps registered in Tennessee are subject to the franchise and excise tax, and filing that late carries its own state-level penalties and interest. Don’t assume that no state income tax means no state filing obligation.

If you’re already late, file immediately. The penalties stop accumulating the day the IRS receives your return. If you can’t pay the full balance, file anyway and set up a payment plan. The failure-to-file penalty is ten times the rate of the failure-to-pay penalty, so getting the return in is always the priority. The IRS offers installment agreements and will sometimes abate penalties for first-time offenders with a clean history.

The best way to avoid this situation is having your business tax returns handled well before the deadline. When your books are current and organized throughout the year, tax prep is straightforward and there’s no scramble in March or April. If you’re behind on bookkeeping and that’s what’s holding up your return, catching up on the books and filing a late return with accurate numbers is still better than filing an extension, forgetting about it, and owing penalties on top of penalties.

Penalties and interest are not tax deductible. That money is gone with no offsetting benefit. If you’re a business owner in the Nashville area looking for CFO services for small businesses to keep your finances on track year-round, getting proactive about deadlines is one of the simplest ways to stop losing money to the IRS unnecessarily.