The IRS has a staggering number of penalties in their arsenal if they want to punish wrongdoers, and many apply specifically to the small businessperson.

1. Accuracy: The IRS can issue a 20% penalty if it finds you were negligent (unreasonably careless) or substantially understated your taxes. This penalty is most often applied to businesses that can’t prove a deduction on an audit as well as to those who forgot to report all of their income.
2. Civil Fraud: Underreport income with a fraudulent intent (i.e., something that doesn’t look like a mistake to the IRS), can translate to a fine of 75% of the amount of the resulting tax deficiency.
3. Failure to Pay on Time: This penalty can be 1/2% to 1% per month to an income tax bill that’s not paid on time and is automatically tacked on by the IRS computer for return that don’t include payment for the full amount owed. Late payment penalties for payroll tax deposits are even higher.
4. Filing Late: File certain income tax returns or other forms late and the IRS can charge you an extra 5% per month on any balance due. The only good news here is that this penalty can only be applied for the first five months following the return’s due date, up to the maximum charge of 25%.
5. Filing and Paying Late: File late and underpay and the IRS can (and probably will) issue a "combined penalty" of 25% of the amount owed. After five months, the "failure to pay" penalty continues at 1/2% per month until the two penalties reach a combined maximum of 47-1/2%. Late filing and paying penalties can be imposed by the IRS in addition to any other penalties, such as for fraud and filing an inaccurate return.
6. Underpaying Estimated Taxes: Self-employed individuals must estimate their income tax for the year and pay it in quarterly installments throughout the year. Here are the rules:
   • Earn less than $150,000 and quarterly tax payments must equal at least 90% of the final income tax bill, or at least 100% of last year’s tax bill.
   • Earn more than $150,000 and the requirement is to pay at least 110% of last year’s tax bill in estimated payments or risk the underpayment penalty on the difference.
   • The penalty for not complying is currently calculated at a 9% annual rate on the amount that was underpaid for each quarter.
   • Quarterly payments should be equal, which means there’s no playing catch-up with larger payments later in the year to avoid this penalty.