Many small businesses are unaware of the reporting requirements that apply to their retirement plans.
In fact, it wasn't too long ago that a study found that an incredible 47 percent of companies were not in compliance.
It's not surprising. There are so many business retirement plans out there -- IRAs, SIMPLE IRA Plans, SEPs, 403(b) Tax-Sheltered Annuity Plans, Designated Roth Accounts, SARSEPs, Multiple Employer Plans and 401(k) plans, to name a few. It's hard to understand the plans themselves, let alone understand all the reporting requirements and tax obligations.
Not Knowing Won't Get You Off the Hook with the IRS
While it's true that small business taxes are complex, ignorance of the tax code is no excuse.
All companies with a pension plan or 401(k) plan must file the annual report with the Department of Labor, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation. Companies that also offer a health plan, and that have more than 100 employees who are plan participants, must also file a Form 5500 welfare schedule -- which is where many businesses seem to run into difficulty.
So, if you didn't file Form 5500-EZ (the most common tax form for retirement plans), then you're likely on an IRS list somewhere and liable for penalties of up to $15,000 per late return. Yikes! That's a lot of dough.
How to Avoid Those Steep IRS Tax Penalties
The good news is that small businesses that didn't file their required annual retirement plan returns can quickly come back into compliance.
The IRS has a low-cost penalty relief program that you can take advantage of.
Specifically, the plan allows eligible small businesses to file late returns and avoid the $15,000 penalty. You pay only $500 for each return submitted, and that caps out at $1,500 per plan. In other words, if you've got four years of returns that you never filed, file all four and you'll only pay $1,500. Without this program, you'd be looking at more like $60,000 in IRS tax fines.
The Word Is Spreading
This is not a new program. The IRS tried out this tax penalty forgiveness program for a year and then made it permanent earlier this year, in May 2015.
This program flew under the radar for some time, but the word is finally getting out about this business-friendly program. In fact, since the program began in June 2014, the IRS has now received over 12,000 late returns.
By my calculations, at $14,500 in penalty savings per return, business owners have avoided paying $174 million in tax penalties as a result of this program. Not too shabby!
Don't Wait, and Don't Forget Your Department of Labor Filings
IRS penalties should not be trifled with. Even in the event of bankruptcy, IRS debts do not get erased and you can't simply close down a corporation to avoid personal liability. Moreover, interest accrues on IRS penalties. Plus, if you owe the IRS taxes, they might file a federal tax lien against you, which can ruin your credit score and make it hard to borrow money.
Additional details on this program, known as Revenue Procedure 2015-32, are available on the IRS website.
By the way, if you do have a retirement plan in place that required a Form 5500 filing, be aware that your next filing date is coming up at the end of this month. The 2014 tax return is due on July 31, 2015 for any retirement plans that operate on a calendar-year basis.
Also, don't forget that your retirement plans also likely require you to file with the Department of Labor (DOL) in conformance with ERISA regulations. The DOL has its own set of penalties but the good news is that they too have a program for delinquent filers. You can find more information on that program on the DOL website.
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