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IRS Tax Penalties

Tax penalties encourage compliance with the tax rules. The Internal Revenue Code imposes many different kinds of penalties. Tax penalties range from civil fines to imprisonment for criminal tax evasion. Some examples of IRS tax penalties include: a failure to file penalty, a failure to pay penalty, an estimated tax penalty, negligence penalty, fraud penalty, accuracy related penalty, substantial understatement of income tax penalty, and unpaid withholding.

The two tax penalties that catch people off guard are the failure to pay penalty and the substantial understatement of income penalty. Why? Because there is a misconception that filing for a tax extension gives you extra time to pay your taxes. This is not the case. You must pay your taxes by the due date. The rule applies to both employees and 1099 independent contractors. You have under paid your tax liability if you owe more than 10% of the correct tax or $5,000. For corporations, the understatement is considered substantial if the tax shown on your return exceeds the lesser of 10% (or if greater, $10,000) or $10,000,000. Please remember that you may have to pay estimated taxes. Estimated taxes are due when you do not pay your tax through withholding, or do not pay enough tax that way.

Tax penalties are generally payable upon notice and demand. Tax penalties are generally assessed, collected and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included).

Failure to File and Failure to Pay Penalties.

  • The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can. Then, explore other payment options.
  • The penalty for filing late is usually 5% of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 of your unpaid taxes.
  • If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
  • If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1% of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25% of your unpaid taxes.
  • If you request an extension of time to file by the tax deadline and you paid at least 90% of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
  • If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
  • You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

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