Things in life do not always go as you have planned them -especially with respect to filing the tax returns and paying the taxes on time. Even with the best intentions, you can end up facing the IRS tax penalty for missing out on the tax filing deadline, underestimating the quarterly payments, or bouncing a check to the IRS.
Mistakes during tax filing can take place. However, it will be immensely helpful when you are aware of the different types of penalties as charged upon by the IRS -including IRS late filing penalty and others. You should also be aware of the manner in which they are calculated. It is also a great idea to know about your options in case you receive a penalty by the IRS.
What are the Common Tax Penalties Imposed by the IRS?
Some of the common tax penalties that are levied upon the by the IRS on the taxpayers are:
Failure to File Taxes
In 2022, the tax returns were due on 14th April. If you needed more time, you could have requested for an extension. Therefore, the next due date is 15th October to file the tax returns. In case you missed requesting the extension or missing the extended due date, the IRS will charge the failure to file or late IRS tax filing penalty.
The tax penalty is 5 percent of the amount of unpaid tax for every month or portion of the month for which your tax payment was late. However, the tax penalty caps at around 25 percent or 5 months of the total balance. If you are more than 60 days late in filing the tax returns, a minimum penalty amount will apply. The penalty amount can be either 100 percent of the tax amount owed or $435 -whichever might be the lesser amount.
To avoid the IRS late filing penalty or failure to file penalty, ensure that you are filing the respective amount of tax returns by the expected due date or even extended due date. This holds true even when you are not able to pay the balance that is due. You can have some more relaxation if you are expecting some tax refund. In the given case, the IRS will not charge the failure to file tax penalty when you end up filing your taxes late. However, you can end up losing the overall return in case you do not file the return within 3 years of the original tax filing due date.
Failure to Pay
Whether you go ahead with filing the tax return on time or extending the filing the date, the IRS expects you to pay the respective tax amount by the tax filing deadline. If you do not pay what you owe by the tax filing due date, the IRS will charge the failure to pay penalty.
The tax penalty for failing to pay is 0.5 percent of the tax amount you owe every month. However, it also caps at 25 percent of the total tax amount due. If you have a dedicated IRS instalment agreement, the IRS will end up reducing the failure to pay tax penalty to 0.25 percent of the total tax amount you owe. This holds true until the time the IRS instalment agreement remains in effect.
Both the failure to pay penalty and late filing penalty are charged on the full-month basis -even if you are paying the balance amount before the end of the month. When both the penalties will apply to the same month, the late filing penalty is reduced by the amount of failure to pay penalty. This ensures that the total amounts for failure to pay and late filing penalties turn out to be 5 percent for any month.
To minimize or avoid penalties related to failure to pay taxes, it is recommended to pay the tax amount in full by the estimated tax deadline. This holds true even when you have requested for the extension. When you owe more than you are capable of paying, it is recommended to pay a maximum amount by the stipulated deadline. Then, you can pay the remaining amount at the earliest. If you are not able to pay the remaining amount within a few months of the stipulated date, you can go ahead with requesting the IRS instalment agreement.
Failure to Pay Estimated Tax
The IRS functions on the ‘pay-as-you-go’ mechanism. This implies that you can continue paying the tax amount throughout the year as you receive income instead of spending a huge amount to the IRS at the year’s end.
If you have more than $1,000 in due upon calculating your taxes, you will be subject to the IRS tax penalty. To avoid this penalty, you should aim at making payments throughout the year through tax withholding from the estimated quarterly payments or paycheck, or even both.
The IRS goes ahead with calculating the given penalty amount by analyzing the amount you should have paid during every quarter and multiplying the existing difference between the amount paid and the amount that should have been paid by the respective interest rate for the given period. This implies that you could be imposed a penalty for a single quarter, and not others.
To minimize or avoid late filing or other tax penalties, it is recommended to adjust the respective tax withholdings from the paycheck. You can also consider estimating the tax bill and making estimated quarterly tax payments. The quarterly tax estimates are due on the following dates:
- 15th April
- 15th June
- 15th September
- 15th January
However, if any of the dates will fall on a holiday or a weekend, the deadline will get pushed back to the upcoming business day.
Avoiding the Penalty for Late Tax Filing
One of the best ways to avoid the IRS late filing penalty is by filing the tax returns by the stipulated due date or requesting the automatic extension of 6 months. You can go ahead with requesting for the tax filing extension by mailing IRS the Form 4868 or paying the tax amount through EFTPS (Electronic Federal Tax Payment System), Direct Pay, or debit or credit card by the due date of 15th April. Leading tax software platforms or services like FlyFin are capable of electronically filing the extension on your part.
If you do not have the option of filing your tax returns on time, you can consider filing and paying the taxes due at the earliest. Then, you can look into the field of penalty abatement. The process of penalty abatement is the one involving reducing or eliminating penalties for taxpayers facing exceptional circumstances or making mistakes. Some of the conditions in which the IRS might consider significant penalty relief are:
- Reasonable Cause: If you were not able to file your tax returns on time due to exceptional circumstances, the IRS can think of waiving the penalties associated with late filing. Some of the instances of reasonable causes are a natural disaster, a house fire, death of a close family member, or some serious illness.
- Penalty Abatement for the First Time: If you have always topped the list of responsibilities related to tax filing, but ended up missing the tax filing deadline due to some reason, the IRS can allow the penalty abatement for the first time around. To qualify for the same, you should have diligently filed all your tax returns, set up the IRS installment agreement, or paid the tax due. Moreover, you should also not possess any prior tax penalties within the period of previous three years.
If you wish to request for penalty abatement by the IRS, you can reach out to the toll-free number on the IRS notice. You can also submit the request in writing by filling out the Form 843. To eliminate the late filing penalty due to some reasonable cause, you are expected to send over copies of supporting documents to the IRS. Some essential documents to consider are a death certificate, reports of insurance claims, or a letter from the doctor.
What Happens When You are Not Able to File Taxes At All?
When you do not file the tax returns at all, the IRS might end up filing one for you. It is referred to as the SFR or Substitute for Return.
When you have the IRS filing your tax return, it appears a convenient situation. However, there is a catch. You will end up owing more taxes significantly than you would have while filing the tax return on your own. It is because the IRS will base the SFR on the respective 1099s, W-2s, and other tax forms. Most of the forms depict information about your overall income -not the deductions. Therefore, if you have major business expenses, extraordinary medical expenses, charity-based donations, or other common write-offs, the IRS will not know about them or include them in the first place.
The penalties for late filing or unpaid taxes can be substantial. Therefore, it is always recommended to be cautious about your tax filing sessions and due dates.