Haven't filed business tax returns in two years? What to do next

Why filing now matters

Two IRS penalties run while returns are missing. The failure-to-file penalty is 5% of the tax due for each month or part of a month the return is late, up to a maximum of 25%. For returns due after December 31, 2025, a return more than 60 days late for Form 1040 or 1120 carries a minimum penalty of $525 or 100% of the underpayment, whichever is less. Separately, the failure-to-pay penalty is 0.5% of the unpaid tax per month, also capped at 25%.

If you do not file, the IRS can file a substitute return for you. It may not give you credit for deductions you are entitled to, so it usually costs more than the return you would have filed.

Step by step

Getting back into compliance is a sequence, not a single filing.

• Pull your IRS account transcripts, or have your tax professional do it, to see what the IRS has on record.
• List the missing years and which returns each needs: business returns, payroll filings, 1099s.
• Catch up the bookkeeping for each missing year, most recent first.
• Prepare and file the returns, starting with the years with the most at stake.
• If you cannot pay in full, set up a payment arrangement at the same time.
• Set up monthly bookkeeping so it does not happen again.

How far back you need to go

The Internal Revenue Manual says the IRS enforcement period for delinquent returns is normally not more than six years, under Policy Statement 5-133, though it can differ depending on the case. In practice that is why the last six years are usually the ones that matter.

Refunds work the other way: to claim a refund on an old return, you must file within three years of its due date. If you are owed money for an old year, it can be lost by waiting.

If you have an IRS notice

Read the notice for the response date and do not miss it, even if the books are not ready. Enrolled agents, certified public accountants and attorneys have unlimited representation rights before the IRS, which means they can deal with audits, collections and appeals on your behalf. A preparer with only a PTIN can prepare returns but cannot represent you.

A bookkeeper's job here is the records behind the response: reconciled books, clear statements and supporting schedules that your representative can rely on.

Extensions and the next deadline

If a current-year deadline is close, an extension buys time to file, not to pay. Businesses use Form 7004 for an automatic six-month extension on returns such as Forms 1065, 1120-S and 1120; individuals use Form 4868. Tax owed is still due on the original date.

If you cannot pay what you owe, the IRS offers an extra 60 to 120 days through its online payment agreement, and longer installment agreements if you need them.

Where SF Business Solutions fits

SF Business Solutions does the bookkeeping catch-up that late returns depend on, in QuickBooks Online or Xero, and prepares and files the business tax returns. Cleanup starts at $250. Our team includes one licensed CPA; for representation before the IRS on an audit or collection matter, you need a CPA, enrolled agent or attorney acting for you.