Taxpayers who do not timely file their returns or timely pay their obligations will be subject to penalties not only at the federal level with the IRS, but also at the state level with the Minnesota Department of Revenue (state).

The state assesses different penalties for taxpayers who are individuals versus businesses. The penalties vary in both severity and in the dates on which returns or payments are due.

Individuals

The penalty for an individual filing a return late is 5% of the unpaid tax. The taxpayer is also subject to an additional delinquency penalty. The delinquency penalty is 5% of the unpaid tax and is assessed if the taxpayer provides no response within thirty days of the state’s demand for an unfiled return. This puts a premium on communicating with the state.

The penalty for paying the tax late is 4% of the unpaid tax. If the taxes are not paid within 180 days from the due date, then the state can assess an additional 5% of the unpaid tax. When the two penalties run together, the individual taxpayer is subject to a total assessment of 19% of the unpaid tax. These are stiff penalties. Although, from a practical standpoint, even though the actual deadline for filing and paying your taxes is April 15, the state will not assess penalties until after October 15. Essentially, this allows the taxpayer a penalty-free grace period to file their return and pay their tax obligation.

Businesses

The penalty for a business filing a late corporate franchise, mining, fiduciary, estate, partnership, or S corporation tax return is 5% of the unpaid tax. The business is also subject to the delinquency penalty of 5% of the unpaid tax. However, the taxpayers filing fiduciary, estate, partnership, or S corporation tax returns receive an automatic six month extension to file their returns and avoid the late-filing penalties. The penalty for a business paying the tax late is 6% of the unpaid tax. If the business does not pay the taxes when it files its return, the state will assess an additional penalty of 5% of the unpaid tax. Whether intentionally or not, the state is making it advantageous for a business to temporarily refrain from filing its return until the business can remit full payment with its delinquently filed return.

Sales, withholding, and MinnesotaCare taxes have different, and often times more severe, penalties for late filing and late payment. The penalty for filing a return late is 5% of the unpaid tax with the delinquency penalty of 5% of the unpaid tax. The penalty for late payment is assessed thirty days after the due date of the payment and is 5% of the unpaid tax. The state can assess this 5% penalty for every thirty-day period that the tax remains unpaid, up to 15% of the unpaid tax. Therefore, making appropriate estimated payments allows businesses with these obligations to avoid being subject to penalty. http://www.irs.gov.

Penalty Abatement

The state, like the IRS, will abate penalties when the taxpayer can demonstrate that he or she had reasonable cause for failing to timely file the return or pay the obligation. Reasonable cause exists when the taxpayer can show that the circumstances that caused the untimely performance were beyond the taxpayer’s control. Some examples of reasonable cause are death or serious illness of the taxpayer or an immediate family member, natural disasters, theft or other criminal activity, or electronic deposit errors on the part of a bank. This is not an exhaustive list. The most important thing to remember when trying to prove reasonable cause is that the circumstances must show that the events were out of the taxpayer’s control.

One major difference between the state and the IRS is that if it is the taxpayer’s first time failing to timely perform, then the state will presume the taxpayer had reasonable cause based upon the taxpayer’s previous good history. However, this presumption can be overcome. If the state believes it would be inequitable to apply this presumption, then the state will not abate the penalties.

More information about state procedures for abating penalties can be found in the MDR Collection Manual and in Revenue Notice #97-01.