3 Most Common IRS Penalties you Should Watch Out for
Each tax year, the IRS charges various penalties for various offenses committed by taxpayers. These penalties fall into different categories, which should tell us rampant or common tax offenses that are committed by both business and individual taxpayers. In this article, we look at the 3 most common IRS penalties.
Why should you know common IRS penalties?
You do so to prevent yourself from being penalized. One of the tools to prevent yourself from being audited and penalized by the IRS is to learn how they usually select tax returns for audits. And, through knowing common types of penalties paid by the guilty party, you will have an idea of what usually gets people in trouble with the IRS.
Nevertheless, what are the 3 most common IRS penalties imposed on taxpayers? See below. These penalties are based on information obtained from the IRS FY 2021 Data Book.
1. Failure to Pay Penalty
This penalty applies when you don’t pay owed taxes by the due date. The federal payment and the filing deadline for individual taxpayers and some businesses is usually April 15 of each year. This applies to the tax year immediately before the current filing season. For example, April 15, 2023, will be the deadline to file 2022 taxes.
Besides the above deadline, we also have quarterly tax payments that are due for each quarter of the year. This applies to estimated taxpayers such as sole proprietors and small business owners. Individuals who make a side income or do not have their employer withhold taxes while expecting to owe $1,000 or more in taxes should file estimated taxes.
A failure to pay by these due dates usually traps the taxpayer into owing more taxes by the April 15 deadline, resulting in failure to pay.
In 2021, the IRS assessed more than 17 million in civil penalties for failure to pay against Individual and estate and trust income taxes. Only 2.2 million were abated. More than 328,000 corporations also failed to pay adequate taxes and were hit with penalties before 76,000 were abated. More so, more than 2.7 million businesses were assessed for failure to pay employment taxes.
2. Underpayment or non-payment of estimated taxes
This is the second biggest type of civil penalty assessed by the IRS for the Financial year 2021. Here, two categories apply as mentioned below.
Underpayment of estimated tax by corporations applies when you, as a business, do not pay all estimated taxes on time. This can easily affect small businesses that do not hire monthly bookkeepers and accountants. This practice leaves the owner or manager having to juggle between running the business, organizing the numbers, and submitting tax requirements.
There is also the underpayment of estimated tax by individuals, which applies when you don’t pay estimated tax accurately or on time as an individual. As mentioned before, an individual taxpayer can be liable to pay estimated taxes when one has side income that is not part of their withholding taxes. You should pay estimated taxes when you expect to owe more than $1,000 in taxes. You can estimate this by looking at your previous returns. Or hiring a tax professional to help you.
If you need help from a tax professional, you can count on me. I helped thousands of individuals and small businesses understand their estimated taxes and how not to be on the wrong side of the IRS. Contact me now for a quick tax chat.
3. Delinquency
This is the third biggest type of civil penalty assessed by the IRS for the Financial year 2021. An account becomes delinquent if the owed amount is not paid when the due date has passed.
Millions of individual taxpayers, small businesses, estates, and corporations were assessed for delinquency in FY 2021. This also resulted in millions of dollars in penalties being slapped on them.
The ugly thing about delinquency is that as time passes, your owed taxes accumulate interest. This means that when you eventually pay, the owed taxes could be far more than you originally owed.
Conclusion
This article has shown that most taxpayers (individuals and businesses) get penalized for failure to pay taxes, including estimated taxes. On the other hand, delinquent accounts usually arise when you fail to respond to IRS notices about your owed taxes. This failure to respond can work against you because the IRS may submit your account to collection agents.
Debt collection agents are a little more aggressive. They may attach your property, leaving your family vulnerable. More so, going through such a route may result in you losing your credit score, hampering any chances of getting fresh credit for your future endeavors.
If you need help organizing your business accounts or to solve any tax issues, contact me for help. I say this because, for businesses, non-existent financial statements are usually the source of non-payment of taxes. How can you pay for something you don’t know? You should know your numbers first and then rightly pay estimated taxes or file accurate returns.
You can contact me through this LINK. Click the appropriate links for accounting and tax services.
Frequently Asked Questions
- What happens if you get a tax penalty?
If you get a tax penalty, you should pay the underlying amount owed plus the penalty as soon as possible.
However, if the penalty is a result of additional owed taxes (by IRS calculations) and you don’t agree, you can lodge a formal complaint as soon as possible. But in such cases, it is advisable to contact a tax professional like me to handle the matter and guide you according to your taxpayer’s rights.
- What does a penalty mean in taxes?
A penalty means that you are being charged by the IRS for paying taxes after the annual deadline or for filing a tax return late. Besides the penalty, the IRS may also charge interest on the amount of money due. The interest is changed quarterly.
- What triggers the IRS underpayment penalty?
This happens when you pay less estimated taxes or don’t pay at all even after the deadline. Please note that this penalty may still be charged by the IRS even if it owes you a tax refund. Therefore, I advise you to pay all owed taxes even if you expect a refund. Better to pay and receive your refund back.
- How do I get IRS penalties removed?
First, you can avoid incurring the penalty by filing your tax return early and paying taxes due before the annual deadline.
But, if the above happens and you are penalized, you may request an abatement of taxes, penalties, and interest. This is done through filing Form 843, Claim for Refund, and Request for Abatement. I advise you to do this through a tax professional to avoid making more mistakes.
- How much are IRS penalties and interest?
Penalties are calculated according to the offense. Late filing penalties are 5% of the tax owed each month, up to 25% of the total owed tax. If your return is over 60 days late, the minimum penalty for late filing is the smaller of $100 or 100 percent of the tax owed.
Late payment penalties are 0.5% of the actual tax owed for each month, or part of a month, that the tax remains unpaid from the due date until the tax is paid in full. There is no maximum limit to the failure-to-pay penalty.
IRS interest rates change each calendar quarter. Beginning October 1, 2022, taxpayers pay an interest of 6% for underpayments.
