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What Is the Average Penalty Paid to the IRS by Automotive Dealers?
Not Filing Returns
- Any automotive dealer business that fails to file a tax return by the original deadline, and doesn't obtain an extension of time to file, will incur a monthly penalty charge equal to 4.5 percent of the tax that remains unpaid after the filing deadline. The penalty continues to accrue until the earlier of five months or the date you file the return. However, after the dealership accrues the maximum 22.5 percent penalty, interest charges will apply indefinitely until the tax is paid. Since the penalty is a percentage of the automotive dealer's outstanding tax balance, it may not reflect the typical penalty most automotive dealers pay.
- If an automotive dealer still owes the IRS income tax after the filing deadline, a monthly penalty equal to one-half percent of the tax debt will accrue. However, the late-payment penalty can accrue for over four years if the tax is not paid before that time. If the business files a tax return on time, this is the only penalty charge the IRS will impose. But if you fail to file a return and fail to pay the tax, the dealership is responsible for both penalties, which accrue concurrently. It is important to note that if you receive an automatic extension of time to file the return, it doesn't extend the time you have to pay the tax too.
Substantial Understatement Penalties
- All businesses are subject to the substantial understatement penalty if the amount of tax you fail to report for your automobile dealership exceeds the greater of 10 percent of the correct amount of tax you should report on the return or $5,000. However, if the dealership operates as a corporation, the penalty applies to tax understatements that exceed the lesser of 10 percent of the correct amount of tax to report or $10,000, whichever is greater or $10 million. The IRS calculates the penalty as an immediate 20 percent increase on the tax the dealership fails to report and pay.
Tax Fraud Penalty
- The most expensive of all the IRS tax penalties is for fraudulent activity. The imposition of this penalty is less common than the others and will increase the amount of tax a dealership fails to pay by 75 percent. This penalty only applies to individuals and businesses who intentionally file an income tax return that is inaccurate for the purpose of defrauding the IRS and saving income tax. Since this penalty can be quite expensive to automobile dealerships who owe substantial amounts of income tax, it can significantly increase the average of dealership penalty charges, and therefore, is not a reliable indicator of automobile dealership penalty charges.