Navigating the US Tax System for Businesses

A taxpayer's tax liability is normally required to be prepaid throughout the course of the year in four equal projected installments, with the balance due by the original tax return deadline. However, because a corporation's tax liability for the tax year is expected to exceed the tiny sum of USD 500, practically all firms must pay their entire estimated tax liability for the year in four estimated tax payments. For calendar year corporations, the four projected payments are due on the 15th of April, June, September, and December. For fiscal year corporations, the four projected payments are due on the 15th of the fourth, sixth, ninth, and twelfth months of the tax year. In general, no payment extensions are granted.

Failure to pay the tax by the due dates listed above may result in anticipated taxes, late payment penalties, and interest charges.

The instalment payments must include estimates of regular CIT and, for foreign firms, the tax on gross transportation income, even if not all of these taxes are disclosed on Form 1120. Although some of these additional taxes are recorded on forms other than the 1120 series, they may need similar expected payments via monthly tax deposits throughout the year. To avoid a penalty, corporations must calculate instalment payments based on at least 25% of the lesser of (i) the tax shown on the current tax return or (ii) the prior year's tax liability, assuming the tax liability was positive in the prior year and the year was 12 months long. Corporations with taxable income of at least USD 1 million (before use of NOLs or capital loss carryforwards) in any of the three preceding years are not permitted to calculate instalment payments based on the prior year's tax liability, except for the first instalment payment. Instead, such firms must calculate instalment payments using the tax stated on their current tax return.Penalties Failure to record and pay US taxes in accordance with the Code mayresult in civil and criminal consequences. The civil penalty provisions are classified into four types: delinquent penalties, accuracy-related penalties, information reporting penalties, and preparer, promoter, and frivolous-filing penalties.

Many, but not all, contain exception provisions that allow for future abatement under fair circumstances.

Many also include restrictions that govern how the punishments interact with one another. These four major civil penalty categories may be further subdivided. First, delinquency penalties can be classified into three categories: failure to file, failure to pay, and failing to make timely tax payments. Failure to make timely tax deposits relates to taxpayers who are compelled to make installment payments or WHT payments. Second, penalties for tax return accuracy are classified as negligence, substantial understatement, considerable overstatement of pension obligations, substantial estate or gift tax value underestimation, and valuation penalties. These penalties are coordinated with the fraud penalty to prevent any penalty stacking. Again, as with other laws, the fraud penalty is not intended to be stacked. The third type of penalty is the information reporting penalty. These penalties may be imposed on persons who have simply a duty to report specific information to the IRS. Although not a penalty, failure to report certain information on overseas operations may result in an extension of the limitations period for tax assessment for correctly failing to report certain information. The fourth and final significant category of civil penalties is preparer, promoter, and frivolous filing penalties. Currently, the most noteworthy of them is the return preparer penalty, which imposes a penalty for a position on a return for which the preparer lacked substantial power and failed to report the transaction.

This section also includes a punishment for the willful or reckless attempt to understate another person's tax liability.

Return preparer fines may also be levied for failing to provide a copy of a return or claim for refund to the taxpayer, signing the return or claim for refund, providing one's identification number, or filing an accurate information return. Other promoter and frivolous-file penalties include a fine for advertising abusive tax shelters, aiding and abetting tax evasion, and submitting frivolous income tax returns. A court may also impose sanctions and costs if a person initiates or pursues a process mainly for delay, takes a frivolous position, or fails to exhaust available administrative remedies. In addition to these major civil penalties, international tax-related penalties for failures other than timely and accurate filing (e.g., wilful failure to report international boycott activity, failure of an agent to furnish a notice of a false affidavit relating to the WHT on dispositions of US real property interests, failure of a US person to furnish information relating to CFCs and controlled foreign partnerships, failure of a US person to report foreign bank accounts Pension and employee benefit-related tax penalties exist to safeguard the policy justifications for the tax breaks, most notably early withdrawal of pension funds. Exempt organisations face a separate set of tailored sanctions. Criminal sanctions exist for more serious failures to comply with the tax system, as well as for intentional activities. Although they apply to corporate taxpayers, they are used more frequently on individuals. In addition to the penalty clauses, interest at statutory rates is often levied on underpayments of tax, and interest cannot be waived.