What Happens If You Don’t File Business Taxes?

Businesses in the United States must file various tax returns, with obligations varying by business structure (sole proprietorships, partnerships, corporations, or LLCs). Business taxes generally encompass income tax, employment taxes, and potentially excise or sales taxes. Income tax applies to all businesses, though partnerships file an informational return. Employment taxes cover Social Security, Medicare, and Federal Unemployment Tax Act (FUTA) taxes, which employers must withhold and pay. Certain businesses may also owe excise taxes.

Penalties for Not Filing

Failing to file business tax returns by the due date can result in financial penalties imposed by the Internal Revenue Service (IRS). These penalties can accumulate quickly, adding to the original tax liability.

The failure to file penalty, outlined in Internal Revenue Code Section 6651, is 5% of the unpaid taxes for each month or part of a month the return is late, capping at 25%. If a return is more than 60 days late, a minimum penalty applies, which is the lesser of $510 (for returns due in 2025) or 100% of the tax owed.

The failure to pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, with a maximum of 25%. If both the failure to file and failure to pay penalties apply, the failure to file penalty is reduced, but combined penalties can reach a maximum of 47.5% of the unpaid tax.

An accuracy-related penalty, specified in Internal Revenue Code Section 6662, may be imposed if an underpayment is due to negligence, disregard of rules, or a substantial understatement of income tax. This penalty is 20% of the underpayment attributed to such errors. Negligence includes failure to comply with tax laws or intentional disregard of rules.

Penalties also apply for not filing information returns, such as Forms W-2 or 1099, by their deadlines. Penalties for late Forms W-2 and 1099-NEC for the 2025 tax year can range from $60 to $680 per form, with no maximum if there is intentional disregard. Interest charges are assessed on underpayments and unpaid penalties from the original due date until the tax is paid in full.

Actions the IRS May Take

Beyond financial penalties, the IRS can take several enforcement actions when a business fails to file tax returns. These actions escalate over time to compel compliance or collect outstanding tax liabilities.

The IRS typically begins by issuing notices, such as CP notices or demand letters, informing the business of its unfiled returns and potential liabilities. Ignoring these notices can lead to more severe actions.

If a business does not file a required return, the IRS may create a Substitute for Return (SFR) under Internal Revenue Code Section 6020. The IRS uses third-party information, such as W-2s or 1099s, to estimate income and calculate tax. An SFR often does not include deductions or credits, potentially resulting in a higher tax assessment.

To secure outstanding tax debts, the IRS can place a tax lien on a business’s assets under Internal Revenue Code Section 6321. A federal tax lien is a legal claim against property, including real estate, vehicles, and accounts receivable, establishing the IRS’s priority claim over other creditors. This lien can affect the business’s ability to sell assets or obtain financing.

The IRS also issues tax levies under Internal Revenue Code Section 6331, allowing it to seize property or rights to property to satisfy a tax debt. This can include bank accounts, accounts receivable, or other business property. A levy is a direct action to collect unpaid taxes and can disrupt a business’s operations and cash flow.

The IRS may issue summonses for records or testimony to gather information for a tax investigation. A summons is a legal order requiring document production or an interview. Non-compliance can lead to court enforcement. While rare, willful non-compliance or fraudulent activity can lead to a criminal investigation.

Steps to Resolve Unfiled Business Taxes

Businesses facing unfiled tax returns can take steps to resolve their situation and return to compliance. Proactive engagement with the IRS is more favorable than waiting for enforcement actions, helping mitigate penalties and interest.

The initial step involves gathering all necessary financial records for the unfiled years. This includes bank statements, invoices, receipts, and payroll records that substantiate income and expenses.

Next, prepare all delinquent tax returns for each unfiled year. Complete the correct forms for your business structure, such as Schedule C for a sole proprietorship, Form 1065 for a partnership, or Form 1120 for a corporation.

After preparing the returns, file them with the IRS. File all delinquent returns, even if the business cannot pay the full tax amount owed immediately. Filing helps reduce the failure to file penalty, which is generally more substantial than the failure to pay penalty.

When tax is owed, several payment options are available. Businesses can make a full payment. If not, an Installment Agreement under Internal Revenue Code Section 6159 allows for monthly payments, typically up to 72 months. The IRS Fresh Start program offers flexible payment solutions, including installment agreements and offers in compromise.

Businesses may also explore penalty abatement under Internal Revenue Code Section 6404 if reasonable cause exists for the failure to file or pay. Reasonable cause can include circumstances beyond the taxpayer’s control, such as natural disasters or inability to obtain records. The IRS reviews these requests on a case-by-case basis. Consulting with a tax professional, such as a Certified Public Accountant (CPA) or Enrolled Agent, can provide guidance through this process.