Taxes can be complicated things. Confusion is common when filing taxes, and just because you’ve filed a return doesn’t necessarily mean your work is done. There are common situations that can arise when people receive a notice from the IRS in the mail or email informing them that they’ve committed a penalty.
Tax penalties occur when taxpayers make a mistake, either an unintentional one, an intentional one, or one of neglect. The IRS will charge taxpayers for penalties, and these often come with interest, so getting a large penalty can put taxpayers in a difficult situation.
Let’s look at five common types of tax penalties.
5 Common Types of Tax Penalties
Failure to File
This penalty is very common and is entirely avoidable. Regardless of how much money you have in your bank account and how much you owe, filing your taxes is incredibly important. Failure to file occurs when taxpayers don’t file their taxes by the deadline. It is a penalty that can be avoided by simply getting your return in on time.
Failure to file penalties can lead to hefty fees. The maximum failure to file penalty is 25% of the taxes you owe, which would occur if you didn’t pay for five months. Interest is also charged.
Failure to Pay
Another common penalty is failure to pay. If you get your return in on time, that is excellent, but you also need to pay the taxes you owe. The failure to pay penalty occurs when a taxpayer doesn’t pay the amount they owe the IRS. The penalty for this is a monthly percentage of the taxes you owe.
Failure to pay penalties don’t accumulate as quickly as failure to file penalties. They can reach a 25% maximum but accumulate at 0.5% of what you owe every month. Even if you don’t have the money, there are ways to avoid this, like setting up a payment plan with the IRS. This will cut the rate in half and allow you time to come up with the money.
Underpayment of Estimated Tax
Underpayment of estimated tax penalties occurs when taxpayers pay money, but it is less than they owe. The IRS has a wide reach and is highly accurate, and you’re not likely going to get away with neglecting your duties as a taxpayer. If you don’t pay the amount you owe, they’ll find out and penalize you.
The IRS bases this penalty on the amount you owe on your return and the amount you’ve paid. They charge interest on these underpayments that change every quarter, so you will owe the amount you didn’t pay and more if you aren’t quick to pay it off.
Accuracy-Related Penalty
If you’re filing your own returns, you better be confident that you know what you’re doing. If not, you may find yourself in trouble with the IRS through an accuracy-related penalty. Accuracy-related penalties occur when taxpayers are when taxpayers do things like file for deductions or credits they aren’t eligible for or underreport their income.
These are significant penalties that can get taxpayers in trouble. The penalty is typically 20% of the portion of the underpayment of the tax plus the amount owed. This is a substantial initial penalty, and they charge interest, so always be careful that you are accurate and honest with your returns.
Dishonored Check Penalty
This is an unfortunate penalty that can pop up for taxpayers. You’ve committed a dishonored check penalty if you choose to pay the IRS with a check or from your bank account, and you don’t have the money and your check bounces. This penalty isn’t as serious as an accuracy-related penalty but can still cause taxpayers problems.
The penalty for a dishonored check is typically 2% of the payment amount if the payment amount is over $1,250. Interest is charged on these penalties, so be careful. Before filing your taxes, always be aware of how much is in your account.
In conclusion, tax penalties can cause serious financial problems if they are allowed to accumulate. You never want to owe money where consistent interest payments are charged, and these penalties are mostly avoidable. Whether it is a failure to file penalty or an accuracy-related penalty, these situations can be avoided by working with professionals.
A tax professional will help ensure your return is done accurately and on time and will discuss payment processes with you, so you know your options. Staying out of trouble with the IRS is important, and tax professionals can help you do this. Having tax problems? Let’s connect.