IRS Tax Problems

Basic Steps to Help Avoid Common IRS Tax Penalties

by
Sonu Shukla
on
12/22/2016
Basic Steps to Help Avoid Common IRS Tax Penalties

If you’ve ever been assessed a penalty by the Internal Revenue Service, then you know it can be a financially painful experience. It is also often unexpected, as most taxpayers are simply not aware that what they are doing (or not doing) makes them vulnerable to fines. We are just a few months from tax season, so it’s a good time to review the actions or inactions that you can be penalized for, and how to avoid having that happen to you. 

Failing to Pay Enough in Withholding and Estimated Taxes

Whether you are self-employed or an employee, all American taxpayers have a responsibility to pay taxes, and to do so through the course of the year rather than waiting until year end. People who are employees pay their taxes through the withholding that they instruct their employer to submit on their behalf, while the self-employed send payments in anticipation of the amount that they expect they will make during the tax year. If there is a shortfall of $1,000 or more by the end of the year, the taxpayer will be charged a fine of 4 percent of the amount that they were short. This underpayment assessment is calculated based on a quarterly basis. It is important to keep in mind that if you have paid 90% of the amount that you owe on the year or 100% of the amount that you owed for the previous year (or 110% for those taxpayers who are considered to be “high income”), then you are considered to have made a payment that qualifies for safe harbor. This means that you avoid having to be assessed this penalty: for those who are either fishermen or farmers by trade, the requirement for prepayment is limited to either 100% of the amount that you owed in taxes the year before or 66 2/3% of the amount owed for the current tax year.

Paying Your Taxes After the Deadline

Every year there is a well-publicized due date for filing your taxes – it’s usually on April 15th, or some date close to that. Taxpayers are permitted to file for an extension on filing their tax return, but that extension does not mean that you are free of the responsibility for paying the taxes that you owe.

For each month that the balance due is unpaid, you face a late paying penalty of ½ percent. The maximum that you can end up owing is 25% of the amount that you have yet to pay. There is just one way to avoid this penalty, and that is to pay the taxes that you owe, when they are due. If you plan on filing for an extension, make sure that you take advantage of the opportunity to calculate the balance that you are likely to owe, and to pay that amount when you file your extension. 

Filing Your Taxes After the Deadline

Not only does the Internal Revenue Service expect you to pay your taxes by the tax filing deadline, they expect you to file it on time for the filing deadline. Even those taxpayers who seek an extension for filing their return are expected to get their application for the extension in by the April due date.

When you miss the deadline for filing, you are subject to a late filing penalty of 4.5% per month of the amount of taxes that you owe on your return, with a maximum penalty of 22.5% imposed. Even though extensions are automatically extended to October 18, 2017, taxpayers are still required to submit the appropriate paperwork. Taxpayers who file after October 18, 2017 are those that the penalty generally applies to, though when the return filing is late by sixty days or more, a minimum penalty is equivalent to either all of the taxes owed on the return or $205, whichever is less.

Taxpayers who are able to offer proof that there was no willful neglect in not submitting their tax return, and who have a justifiable and reasonable excuse for not having paid the taxes, are generally able to avoid having to pay the penalty.

Negligence

There are some instances when a taxpayer is required to pay a 20% underpayment penalty for errors in tax valuation. These are usually a result of either overstated deductions or unreported income, and the penalty is classified as being negligent. The best way to avoid being assessed this penalty is to make sure that you include all of the pertinent tax information that you have from every source of income. These can include K-1s, 1099s and W-2s.  If you work with a tax professional who provides you with a tax organizer, make sure that you complete it thoroughly and provide documentation for any tax deductions to which you feel you are entitled.

Dishonored Check

It is never a good idea to bounce a check, and that is especially true when it comes to writing checks to the IRS to satisfy your tax liability. When you owe the IRS money and you don’t have enough in your account to cover it, you are much better off contacting the agency to arrange for a payment plan then to write a check with insufficient funds backing them up. The penalty for writing a bad check to the IRS is considered to be 2%, but if the amount that the check is written for is for $1,250 or less, the government’s assessed penalty will either be for $25 or the amount that the check was written for – whichever is less.

 Missing ID Number

When taxpayers fill out their tax return, they are supposed to provide complete information. One of the most important data points is the taxpayer’s Social Security number, and when that is not included the IRS will assess a penalty of $50. That fee is charged for each missing identification number, so if the taxpayer leaves out their own Social Security number, their spouse’s number, a dependent or anybody else included on the tax return, the fees can add up quickly. The IRS can also assess this fee if the taxpayer is asked for their Social Security Number by another entity such as an employer or a business for whom they provide contractor services.

This list is by no means comprehensive – there are many other actions or inactions that can result in fees. Some of these fees can be abated if you know how to approach the IRS in the appropriate way and with good reason.

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

SONU SHUKLA, CPA, P.A.
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