Save Yourself From These Common IRS Penalties

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How Much Tax Debt Do You Owe?

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Jill Bridges
Jill Bridges
October 30, 2018

  • Every year, countless taxpayers find themselves penalized by the IRS for a problem with their tax returns.
  • Failure to file and failure to pay are the two most common reasons for IRS penalties, and it’s also possible to face combined penalties.
  • There are several penalty-relief options available to taxpayers, including a first-time penalty abatement or an administrative and statutory waiver.

Filing your taxes can be one of the most challenging processes that you do each year. Not only is it a tedious task, but there are many elements that can go wrong if you are not careful. Missing deadlines and making calculation errors is only the start of your problems. Failure to meet certain requirements can result in IRS penalties that will add to your tax burden. To mitigate or avoid such problems altogether, consider the following information as you look towards filing your tax return.

Filing Deadlines

First and foremost, mark April 15 on your calendar. This is the hard deadline to file a tax return with the IRS each year to avoid additional problems. It is worth noting that if the due date on a particular year lands on a holiday or a weekend, then you will have until the end of the next business day to send in your tax return.

If you can’t make the deadline, then you will be required to send in Form 4868 to get a six-month extension. Whether or not this extension is granted by the IRS, keep in mind that you will have to pay interest on the taxes that you haven’t paid during this time. Also, you may find yourself still needing to pay a late penalty. This penalty can range from 5 percent to 25 percent of the amount due depending on how late the filing ends up being. If you do have a valid explanation for filing late, then attach relevant documentation to your tax return explaining the situation in detail.

Save Yourself From These Common IRS Penalties

Accuracy Penalties

Understating your income on your tax return is an excellent way to fall under IRS scrutiny. On top of having to pay the proper amount, 20 percent of the understated amount will be added as a penalty. All of this will also accrue interest over time, so make sure to be as accurate as possible from the start.

On the other side of the coin, you should also make an effort to avoid accidentally overstating your income. Firstly, you don’t want to pay more taxes than is necessary. Secondly, it becomes quite difficult to prove that you have overstated your income after the fact. You’ll need to submit an amended tax return and include documented evidence pertaining to the discrepancy in the original.

Accuracy penalties can apply to businesses as well as individuals. Businesses that fail to calculate employee taxes correctly can be stiffly penalized by the IRS. If a business does not correctly calculate these taxes, a 100 percent penalty may apply. This means that the business will basically be taxed twice for their employees.

There are two different circumstances where a business can be liable for this 100 percent penalty. The first and most common scenario is not reporting wages correctly through a payroll provider. The second situation when this penalty may apply is not reporting employee tips.

A failure to deposit penalty is another penalty that businesses may face. If a business has employees, it must deposit tax payments based on a set schedule. The IRS sends letters to businesses outlining this schedule. If a deposit is late, the business may face a penalty, based on the following timelines:

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  • 1 to 5 days late: 2 percent penalty.
  • 6 to 15 days late: 5 percent penalty.
  • Over 15 days late: 10 percent penalty.

There is a 10 percent penalty for missed electronic payments, and if a deposit is not made within 10 days after a first notice, there is an additional 15 percent penalty.

Not Paying Your Taxes On Time

In addition to making sure that your return is accurate and you’ve filed by the correct deadline, you also need to be sure that you are actually paying your taxes. Failure to pay penalties are just as common as failure to file penalties, and both occur when you have failed to pay your tax balance by the required deadline.

Each month that you fail to pay your taxes, you will be charged an additional 0.5 percent of your unpaid tax balance. These penalties can accumulate up to 25 percent of your unpaid taxes. The unfortunate thing about a failure to pay penalty is that it can be charged even if you did attempt to pay your taxes. For instance, if you mailed a check to the IRS for your taxes, and the check bounced and caused you to miss the payment deadline, the penalty would still apply.

Remember that filing for a tax extension does not extend your due date for paying your taxes. Extensions only give you extra time to file your return. An extension can, however, help you to avoid the failure to pay penalty. For instance, if you’ve been approved for your extension and paid 90 percent of your tax balance by the original deadline, you have until the extended filing deadline to pay the remaining 10 percent of your balance.

Combined Penalties and Additional Payments

Unfortunately, it’s very common for taxpayers to miss both the filing deadline and the payment deadline. Luckily, if you miss both of these deadlines, you won’t be doubly penalized. You will only need to deal with the 0.5 percent penalty for late payment.

After you’ve submitted your return and paid your taxes, it’s possible that the IRS will determine that you actually owe more than you initially calculated. If this occurs, you will be sent an Issuance of Notice alerting you that you need to make an additional tax payment. After you have received this notice, you will need to make your tax payment within 21 calendar days. If you do not make a payment within this time frame, you will be charged the 0.5 percent tax penalty per month until your debt is fulfilled.

In addition to your tax return, there are several other forms that you may need to file with the IRS, and a failure to file these forms in a timely manner will also result in a penalty. For example, traditional employees and contractors can be charged a maximum $50 penalty for not submitting their W2 or 1099 form on time. S corporations that don’t file their 1120S form or partnerships that fail to file a 1065 form can be charged a maximum monthly penalty of $195.

Denied Deductions

Tax deductions can be beneficial to make sure that you get to keep the most of your hard-earned money. Of course, this is only true so long as you make sure to do it properly. Otherwise, you’re going to find your attempts at saving money be very counter-productive. For the most part, it just comes down to reading up on the rules and regulations surrounding whatever deductions you’re trying to get.

For instance, let’s take charity deductions for example. You could save up to 50 percent of your adjusted gross income every year when done correctly. Although, just like every other part of this process, the onus is on you to ensure the documentation is in order. When you want to get a charitable deduction, you have to make sure that the organization first qualifies for an IRS deduction. Donations to political organizations, sports teams, and workers associations, for instance, aren’t deductible. You’ll also need to get a canceled check or receipt to prove and specify the details of the donation.

Dishonored Check Penalties

Although it’s possible to pay your taxes electronically, many taxpayers still choose to pay by check. If you choose to pay by check, and your bank does not honor the check, the IRS will charge you a penalty. The amount of the penalty will depend on the amount of the check that was not honored.

If your dishonored check was for less than $1,250, your penalty will either be $25 or the payment amount, whichever is less. A 2 percent penalty on the payment amount applies to dishonored checks for tax payments over $1,250.

Available Relief

If despite your best efforts, you receive a penalty from the IRS, there are ways to alleviate the situation. Depending on the circumstances in which you were given these penalties, you may be able to apply for penalty relief. There are a few different kinds of assistance that are available:

  • Reasonable Cause:¬†There are a lot of incidents that can fall under this banner. A death in the family, legal incident, or natural disaster all can be considered reasonable cause. If you find yourself unable to file a tax return or pay your taxes due to any reasons were beyond your control, then you might want to consider this option.
  • First Time Penalty Abatement:¬†This relief applies if this is your first year having to pay taxes or you haven’t had to pay taxes in the past three years. This aid is to make sure that new taxpayers aren’t ambushed by new responsibilities and obligations for which they aren’t prepared. Keep in mind, you’ll still need to file your return and pay your taxes. This will only protect you from the penalty.
  • Administrative and Statutory Waiver: In the case that you speak with or receive written instructions by an IRS employee that results in a penalty, then this relief is for you. In some cases, you will need to provide evidence that some wrong direction you were given directly caused your penalty in the form of Form 843.

Appealing Relief Denials

Hopefully, you’ll be able to remove your IRS penalties with one of the relief options mentioned above. If the IRS denies your relief request, however, it doesn’t necessarily mean that you’ll need to pay the penalty. After a denied request, you have the option of appealing the decision. Make sure that you appeal the denial within 30 days after the original denial. If you do not appeal within this time frame, you will likely have to pay the full penalty.

During the appeal process, you will need to provide a clear timeline of the events that caused you to either miss your tax payment or your filing deadline. Provide concrete dates of every event involved, and bring along any documents that would support your claim.

You should be prepared for the IRS to ask how the events that prevented you from filing or paying your taxes impacted other areas of your life. For example, if you can demonstrate that the issues that interfered with your tax obligations also prevented you from working or paying your bills, then you may have a good chance of succeeding in your appeal.

IRS Online Relief Tool

The IRS website has an online self-help tool that will guide you through the process of getting the relief that you need. The online tool itself will only apply if you qualify for reasonable cause relief or if you were misled by an IRS administrative error. In any other case, the tool will instruct you to file an appeal instead.

Avoiding IRS Penalties

Making sure that you are preparing your taxes correctly is the most effective solution for avoiding penalization by the IRS. Double-check everything that you include in your tax return so that you catch any errors. If you are able to, it’s better to file your tax return and make your payments early than to risk missing a deadline.

Using tax preparation software can help avoid making errors on your return. Paying a tax professional to prepare your return is also a good idea if you want to be certain that you won’t face a penalty. Take these precautions, and you shouldn’t have to worry about having to pay a costly IRS penalty.

The burden of taxes can be a heavy load for many businesses and individuals. The added burden of IRS penalties can make the problem seem insurmountable.  Fortunately, there are options to help you regain control of your situation. Solvable can help you understand how to manage your tax debt, and also offers reviews of reputable debt relief companies that can help ensure that sure you get the help you need.

 

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