Penalties almost always come from the returns people forget, not the returns they worry about. For growing businesses in the U.S. and Canada, three specific filing gaps create most of the exposure: information returns, state and provincial nexus, and foreign reporting. Close these three and the IRS and CRA notice risk drops materially.
Gap 1: Information Returns That Do Not Feel Like Tax Returns
1099-NEC, 1099-MISC, 1099-K, W-2, T4, T4A, T5, and T1135 do not calculate tax owed, so growing businesses forget them. The penalties add up quickly: up to $310 per 1099 in the U.S., CAD 100 to 2,500 per T-slip, and up to CAD 12,000 for late T1135.
The biggest driver is a vendor list that grows faster than the bookkeeping team can track. A contractor paid $750 in December often goes on the list in February but never makes it onto a 1099 because the address, TIN, or SSN was never captured. When the IRS cross-matches payee 1099 records to payer-side records, the missing slip shows up.
Our fix is an annual information-return calendar built in January. Every vendor over $600 is flagged, W-9s are collected, TIN matching is run, and draft 1099s are produced two weeks before the deadline. The same discipline applies to Canadian T4A contractors and T5 interest payments.
Gap 2: State and Provincial Nexus That Was Never Mapped
A remote hire, a warehouse, an inventory shipment, or crossing the Wayfair threshold in a U.S. state quietly creates nexus. Each new nexus adds sales tax, income tax, and sometimes franchise tax filings. Missing any of them triggers notices and penalties months or years later.
The classic example is an ecommerce business based in Florida that crosses the $100,000 sales threshold in California, Texas, and New York. None of those states sent a welcome letter. The exposure accumulates until the business applies for a financing or an acquirer runs diligence and discovers the missing registrations.
Our fix is an annual nexus review. We register where thresholds are met, use Voluntary Disclosure Agreements (VDAs) in U.S. states and the CRA Voluntary Disclosure Program (VDP) in Canada to clean up historical gaps with reduced or waived penalties, and set up monthly or quarterly filings going forward.
Gap 3: Foreign Reporting Obligations (FBAR, FATCA, T1135)
U.S. persons with foreign financial accounts over $10,000 at any time in the year must file FBAR (FinCEN 114). U.S. persons with specified foreign financial assets over threshold amounts file Form 8938 with their 1040. Canadian residents with specified foreign property with cost base over CAD 100,000 file T1135.
Penalties for non-filing are severe. FBAR non-willful penalties run up to $10,000 per account per year, and willful penalties can reach the greater of $100,000 or 50% of the account balance. T1135 penalties start at CAD 2,500 and escalate. These are information returns, not tax returns; the penalty exists even when the tax owed is zero.
Our fix is a year-end client questionnaire that specifically captures foreign account balances, foreign real estate, foreign brokerage, and crypto held on foreign exchanges. Where past years are missing, we use the IRS Streamlined Procedures (for non-willful cases) or Delinquent FBAR Submission, and the CRA VDP.
Gap 4 (Bonus): Payroll Tax Deposit Timing
Growing businesses regularly miss the monthly versus semi-weekly federal payroll deposit schedule in the U.S., or the quarterly versus monthly remittance threshold in Canada. A one-day late deposit creates a 2% penalty; a two-day late deposit jumps to 5%; after 15 days the penalty climbs to 10%. These compound quickly on a $200,000 weekly payroll.
The fix is automation. Every U.S. payroll provider (Gusto, Rippling, ADP) can be set to auto-debit and auto-deposit. In Canada, CRA payroll remittances can be automated through the bank feed. Manual remittance is where the mistakes happen.
Voluntary Disclosure: The Door That Closes After First Contact
Both the IRS and the CRA offer voluntary disclosure programs that reduce or eliminate penalties if the taxpayer comes forward before being contacted by the authority. Once a notice, audit letter, or examination begins, the door closes.
If you know you have a gap, the sequence is: assemble the facts, quantify the exposure, choose the right program (IRS Streamlined, Delinquent International Information Return Submission Procedures, or CRA VDP), and file before any inquiry arrives. We have yet to regret moving early; we have frequently regretted waiting.
Building a Compliance Calendar That Catches These Gaps
Prevention is cheaper than abatement. A compliance calendar that runs from January (information returns) through March and April (T2, 1120, 1065, 1040), June (quarterly estimates, T1 for self-employed), September and October (extended returns), and December (year-end planning) surfaces every obligation before it becomes a penalty.
TYM builds a client-specific calendar at the start of every engagement, tied to each entity, each jurisdiction, and each responsible person. The calendar is the single best tool for killing this category of risk.
The Cost of Doing Nothing
A mid-sized cross-border business with one forgotten FBAR, two missed 1099s, one unfiled state sales tax registration, and late payroll deposits for two months can easily see $50,000 to $150,000 in penalties accumulate over a single year. That is cash out of the business for returns that mostly carried no tax.
Each penalty, assessed individually, looks small. Together they consume cash that should be funding hiring, marketing, or product. We routinely find businesses carrying six figures of unnecessary penalty exposure that could have been prevented for a fraction of the cost.
Owner Liability and Trust Fund Recovery
Some unpaid taxes are not just business obligations; they pierce the corporate veil. The U.S. Trust Fund Recovery Penalty (Section 6672) personally assesses the responsible person for unpaid payroll withholding equal to the full amount of the trust fund taxes (federal income tax withheld plus the employee share of FICA). The CRA has parallel director liability for unremitted payroll source deductions and GST/HST.
This is why payroll tax remittance and sales tax remittance should never be the cash management lever a struggling business pulls. The personal exposure outlasts the entity, survives bankruptcy in many cases, and follows the responsible individual. We treat trust-fund obligations as untouchable when advising on cash management.
How TYM Handles Notice and Examination Response
When a notice or examination letter arrives, the response window is usually 30 days. We log the notice in our tracker, assign a CPA owner, draft a response, and reply within 14 days with documentation. Penalty abatement requests, reasonable cause statements, and FTA requests are filed in writing with supporting evidence.
For audits that escalate beyond a notice, our enrolled agents and CPAs represent the client throughout examination, appeals, and (if necessary) collections. Most clients never see the IRS or CRA officer directly. The objective is to close the matter quickly and preserve the client's relationship with the authority for future filings.
Can penalties be abated after they are assessed?
Sometimes. Reasonable cause abatement exists in the U.S. (first-time abate for eligible taxpayers), and taxpayer relief is available in Canada under specific circumstances. Prevention is always cheaper.
How far back can the IRS or CRA go?
Generally 3 years, extended to 6 years for substantial understatement, and unlimited for fraud or unfiled returns. Foreign information returns often carry a 6-year statute.
What triggers a voluntary disclosure rejection?
The most common trigger is prior contact from the tax authority. Once a letter, audit, or examination has started, most voluntary disclosure programs are no longer available.
Are these penalties deductible?
No. Tax penalties are not deductible under either U.S. or Canadian rules. Interest may be deductible in limited business contexts but usually is not at the individual level.