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Backfiling Tax Returns: What It Is and Why You Should Avoid It

  • May 4, 2016 | Suzanne Kearns

Most business owners do all they can to file their sales and use tax returns on time, but occasionally something happens that makes it impossible to file the return by the due date, and that forces them to backfile the return (or file "back taxes"). Backfiling is when you are late in filing for one of these reasons:

  • You never filed your tax return and didn’t pay the taxes owed.
  • You made an error in the original return and need to file an amended return to correct it.
  • You are late in filing your sales tax return, so when you do file, it’s past the due date.

Although these are common reasons for backfiling sales tax returns, the process can easily open you up to some negative consequences. Here are a few reasons why you should do all you can to avoid backfiling your sales tax returns.

  • Fees and penalties. Most states charge business owners a fee or penalty if they backfile their sales tax return. Every state has different fee schedules, but let’s use California law as an example. If you backfile your sales taxes in that state because they’re late, you’ll pay a 10 percent penalty. If you simply failed to file your taxes, you’ll also pay a 10 percent penalty, but if you failed to file your return because of an effort to evade them or commit fraud, you’ll pay an additional 25 percent penalty. And if you knowingly collect sales tax from customers and then intentionally don’t remit them to the state, when you finally do backfile them, California will charge you the 10 percent standard penalty, plus an additional 40 percent penalty.
  • Interest. In addition to fees and penalties, many states also charge interest on taxes that are paid by backfiling. Again, all states differ in the amount of interest they charge, so you’ll need to check with your state’s Department of Revenue to learn about the laws in your area. But keep in mind that some states, like California, even charge interest for an amended return if you owe more than you claimed in the original return.
  • Audits. Backfiling may trigger an audit, according to Forbes, as will filing a return but not remitting the tax. That’s because state DORs routinely audit businesses that file their taxes late, especially if it becomes a habit. Massachusetts for example, states on its site that “a history of late filing or underpayment may lead to an audit.”

So how can you avoid the fees, penalties, interest charges, and possible audits? You’ll need to be proactive with your sales tax obligations and do all you can to get your returns in on time. Don’t forget about sales tax automation software and automated sales tax filing programs, which not only make the process easier, but also less likely that you’ll file late because you’ll have all the information you need at your fingertips.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns