IRS penalties can have disastrous consequences for individuals and businesses alike. In fiscal year 2020, the IRS collected $31.4 billion in civil penalties and over $5 billion in employment tax penalties in 62,997 penalty cases.
This guide to IRS penalties will help you avoid becoming a part of this year’s statistic. Understanding tax rules and regulations will help you sidestep the pitfalls and make it through tax season without issue.
The Purpose of IRS Penalties
The IRS penalties are set up to encourage taxpayers to file their returns on time and in the proper way. The penalties also ensure that taxpayers pay an accurate full amount of owed taxes and that their tax return is completely accurate.
How Will You Know if You’ve Incurred a Tax Penalty
If you are facing a tax penalty, the IRS will send a notice letter with the following info:
- The penalty you received
- An identification number for your penalty case
- How to handle the penalty
- The reason for the penalty
- How much you’ll have to pay
After you receive a notice, you should verify the information on your notice. If you notice any discrepancies, reach out to resolve them as soon as possible.
If you received a notice, don’t panic. You can resolve some notices without paying a penalty if you cooperate and address the issues at hand.
Types of IRS Penalties
Information Return Penalty
Taxpayers receive an Information Return penalty when they don’t file correctly or provide the required information return or payee statement by the designated due date.
The IRS charges a $50 fee for each information return or payee statement that is late. This penalty also accrues interest until you pay the balance in full.
International Information Reporting Penalties
The International Information Reporting penalty applies to taxpayers with financial activities from foreign sources who don’t follow the tax rules, laws, or regulations. The penalty fee depends on the type of international information return that you file.
Failure to File Penalty
Failure to File comes with the steepest penalty of all, and it’s reserved for taxpayers who don’t file their tax returns on time. You should always file on time. If you are worried about filing on time, you should file for an extension to avoid this penalty.
The Failure to File Penalty is equal 5% of the unpaid taxes owed times the number of months after the due date that your tax return is filed. Keep in mind, that if your return is over 60 days late, you’ll be required to pay a Failure to File Penalty fee of $435 or 100% of the tax shown on the return, whichever is less. This penalty also charges interest until paid in full.
Failure to Pay Penalty
The Failure to Pay penalty charges you when you don’t pay the tax shown on your return or fail to pay the tax you didn’t report on your return by the due date. The fee is 0.5% of the unpaid taxes times the number of months past the due date.
The penalty won’t exceed 25% of the unpaid taxes. The IRS does charge interest on this penalty until it is paid in full. If you don’t pay within ten days of receiving the Failure to Pay Penalty notice, the penalty fee will increase to 1% per month.
The IRS will apply the Accuracy-Related penalty when you are negligent or disregard the tax rules and regulations, and then you don’t claim all your income or claim deductions or credits that you’re unqualified to use.
The penalty fee is 20% of the underpayment of tax due to negligence or disregard. The IRS does charge interest until the penalty is paid in full. You’ll receive this penalty if don’t keep proper records that prove qualification for credit or deductions, fail to report income like from a Form 1099, or don’t check the accuracy for a deduction or credit that seems too high.
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Failure to Deposit Penalty
You receive the Failure to Deposit penalty when you don’t pay employment taxes on time, in the right amount, or the right way.
Penalties vary depending on how late your deposit comes, but it can range from 2%-15%.
Dishonored Checks Penalty
A Dishonored Checks penalty applies when you have insufficient funds in your bank account to cover your tax payment.
The fee comes to 25% if the amount paid is less than $1250. Payments totaling $1250 or more incur a 2% penalty.
Underpayment of Estimated Taxes
The IRS issues its underpayment of Estimated Tax by Corporations penalty to taxpayers that underpay or miss the deadline for estimate tax payments. The penalty’s total depends on the size of the underpayment, how late it was submitted, and the interest rate for underpayments.
How to Avoid IRS Penalties
To avoid paying IRS penalties, you should do the following depending on your situation:
- Request an Extension to File: If you need more time to prepare an accurate tax return, you can get an additional six months to file by filing an extension. However, you still have to pay your owed taxes by the initial deadline.
- Apply for a Tax Payment Plan: If the owed taxes are more than you can afford, you can apply for a payment plan to spread the payment over periodic installments.
- Get Help from Tax Professionals: If you are concerned about submitting an accurate tax return, you should enlist the help of an accounting expert. You can always contact the IRS via their phone assistance but this may be tedious and difficult to answer your specific questions about your return.
Talk to an Experienced Tax Pro Now
Our team at Tax Hack is dedicated to helping businesses like yours minimize their tax bill and avoid IRS penalties. We can help you address all of your business’s toughest tax challenges, from top-down CFO services to bookkeeping, tax prep, and everything in between.
Sign up for a one-on-one strategy session with a Tax Hack pro to see how much you can save.