Avoid Tax Penalties

Sandra Gulledge explains how to avoid IRS penalties

Although the focus is on the holidays right now, it is important to remember that tax season is right around the corner. No one wants to receive a letter from the IRS telling them there was an error and they not only owe additional taxes, but penalties which can be significant. Sandra Gulledge of Tax Chicks provides a few tips to help avoid errors and penalties.

“The late filing penalty is one of the most frequent issues taxpayers may encounter. If you fail to file your tax return by the due date, or extended due date, the IRS typically imposes a penalty of five percent of the unpaid taxes for each month your return is late, up to a maximum of 25 percent,” Gulledge said. “If more than 60 days pass without filing, the minimum penalty is either $435 or 100 percent of the unpaid tax, whichever is less.”

Gulledge explained that filing late could also result in a late payment penalty which is one-half percent of the unpaid taxes for each month that the tax remains unpaid, up to a maximum of 25 percent. Gulledge stated that even if you cannot pay the full amount, filing taxes on time can reduce the penalty. Many taxpayers qualify for a payment plan which can prevent escalation of the issue.

“Small business owners and self-employed individuals are required to make quarterly estimated tax payments,” Gulledge said. “If you fail to pay enough taxes throughout the year, the IRS may assess an underpayment penalty. This applies to those who don’t have sufficient withholding or don’t pay enough in quarterly taxes.”

Another penalty the IRS can assess is an “accuracy-related penalty.” This is assessed when a taxpayer understates their income significantly. It can also be assessed if you use deductions or credits, you are not permitted to take. This penalty is usually 20 percent of the underpaid tax.

“In some cases, the IRS may charge this penalty if they determine you were negligent or didn’t have a reasonable basis for your tax position,” Gulledge said. “If you are an employer required to withhold payroll taxes, failure to deposit the taxes with the IRS can lead to significant penalties, ranging from 2 to 15 percent of the unpaid amount.”

Usually, a penalty is triggered when you make a mistake, miss a deadline or don’t comply, Gulledge explained. The best way to avoid penalties is to file and pay on time. If you owe more than you can pay, set up a payment plan as soon as possible. Keep accurate and detailed records throughout the year.

“If you are self-employed, pay your quarterly estimated taxes,” Gulledge said. “Stay compliant with payroll taxes.”

If you are already facing a penalty, there is still hope according to Gulledge. You can request a penalty abatement if this is the first time you have been assessed penalties or your last penalty was more than three years ago. Showing reasonable cause, such as illness, disaster or unavoidable absence, as to why you filed or paid after the deadline may cause the IRS to waive the penalty.

“You can also submit an offer of compromise if you are under financial hardship or cannot pay your tax bill in full,” Gulledge said. “Sometimes the penalties are the result of more complex tax issues and that is when you need to talk to a tax professional.”