Owing Taxes is not pleasant. However, if you file a tax return that upsets the IRS then the IRS will charge you penalties and Interest that will make you wish you filed your return correctly in the first place. As a taxpayer or business owner you should be aware of what upsets the IRS and avoid making the mistakes in your tax return that will bring you tax penalties.
The following are examples of common tax penalties to be avoided:
1) Penalty for Not Filing a Return at all
If you don’t have the money to pay your taxes It is far better to file your return on time and not pay your taxes than to not file your return at all. Not filing your return will cost you an additional 5% penalty of unpaid tax each month. This penalty is far worse than the additional 0.5% penalty each month you get for filing on time and not paying what you owe.
The failure to file penalty will max out at 25% of your unpaid taxes which you will reach if you don’t file for 5 months. However, the 0.5 % failure to pay penalty will continue to accrue up to another 25% of what you owe until the tax is paid.
Tax returns are due Monday April 15, 2019. If you don’t file a tax return by that date or don’t file for an extension, then the 5% penalty for not filing starts April 16th.
This is the easiest penalty to avoid which you can do by simply filing your return on time. If you do not file a return there is no statue of limitations for the IRS to penalize you.
2) Penalty for Not Paying the Taxes that are Owed
If you file your return on time and don’t pay the taxes you owe then the penalty is 0.5% of the taxes you owe which accrues up to 25% of what you owe until the tax is paid.
3) Penalty for Not Paying Enough Tax during the year (Underpayment Penalty)
Because the US tax system is a pay as you go system tax payers are required by law to pay most of their tax obligation during the year rather than pay it all at the end of the year. You pay this by having tax withheld from your paycheck or pension payments or by making estimated tax payments. Normally you avoid underpayment penalty if:
You paid at least 90% of your tax liability for 2018 or your payments during the year totaled to 100% of your tax liability from 2017 (or 110% if your adjusted gross income is >$150K. or $75K of married filling separate)
For this year the IRS lowered this threshold to 85% of your 2018 tax liability. If you paid less than 85% then you will not be eligible for the waiver and your penalty will be calculated using the 90% threshold.
4) Penalty for Filing an Inaccurate Return due to Negligence or Disregard of Rules (Negligence Penalty)
If you get audited you may get a penalty if the IRS changes your return and says you own more taxes. If the IRS thinks you understated your taxes too much (i.e., you were off by 10% or $5K whichever is greater) or if they think you were negligent by overstating your deductions or not reporting all your income they will fine you a penalty of 20% to 40% of the amount you underpaid (40% is for gross valuation misstatements). The IRS defines negligence as failure to make a reasonable attempt to comply with tax laws. The IRS will like assess you with the negligence penalty if:
- You did not include income from an information statement (e.g., 1099-MISC)
- You did not make a reasonable attempt to confirm whether you were entitled to claim a deduction or credit or exclusion on your return (i.e., one that a reasonable person would think was “too good to be true”)
- You don’t have records to support your tax return items
5) Penalty for Filing a Frivolous Tax Return
If you file a Frivolous return then the IRS will fine you a penalty of $5K. They could also add to that late penalties, accuracy related penalties, fraud penalties, erroneous claim penalties and so on. An example of a Frivolous return is you write a letter to the IRS telling them that you owe no taxes because the IRS does not have the authority to tax you.
6) Penalty for Filing a Fraudulent Return
If there is any underpayment of your tax due to fraud you will get a penalty of 75% of the underpayment added to your tax. Tax Fraud is defined as “intentionally” falsifying information on a tax return to limit your tax liability. It is willful cheating on your return to avoid your tax obligation. In contrast the previously mentioned negligence penalty is due to careless errors, or honest mistakes that results in the lower 20% to 40% penalty.
There are other tax penalties such as forgetting about that foreign account, retirement account actions or inactions, and so on.
Interest is added to penalties. Sometimes these penalties and interest can be abated or removed. Contact me to learn more about how that is possible. If the IRS has contacted you for an audit or if you have not filed back returns then I can help you. I am a tax debt resolution specialist and am licensed to represent you before the IRS.