Tax Penalties
IRS Tax Penalties and Interest You Could Be Charged
IRS Tax Penalties and Interest You Could Be Charged
The IRS can charge you with many different types of tax penalties for failing to meet your responsibilities as a taxpayer. The IRS will automatically assess some penalties when you miss a deadline or don’t pay your tax bill on time. These are civil tax penalties. Criminal tax penalties, in contrast, are only assessed when the IRS believes you intentionally violated the tax laws by committing tax fraud or tax evasion.
You can avoid or minimize most IRS tax penalties by filing an accurate tax return and paying your taxes on time. If the IRS charges you a tax penalty, you may be able to use penalty abatement to reduce the amount you owe.
Penalty for Filing Late When Taxes are Owed (Failure to File Penalty)
The late filing penalty is 5% of the tax owed per month. The maximum penalty is 25% of the tax owed, and returns that are at least 60 days late face a minimum penalty of $210 or 100% of the tax owed, whichever is less. You can read our article on the penalties for late tax returns to learn more.
To avoid the late filing penalty, you should file on time even if you can’t pay your full tax bill. You may be able to enter into an installment agreement to pay off your balance with monthly payments. You can also request an automatic six-month filing extension to avoid this penalty.
If you never file your return, you could face additional consequences beyond the failure to file penalty. The IRS can file a substitute return (SFR) on your behalf and then attempt to collect the back taxes due from you using bank levies or wage garnishments. When the IRS files an SFR, they will generally assess the tax at a higher amount than you would have owed if you filed on your own since it will not include deductions or tax credits.
Penalty for Paying Taxes Late
If you pay your taxes late, the IRS will assess a failure-to-pay penalty. Like the late filing penalty, this is also based on a percentage of your tax liability. The penalty is 0.5% of your tax bill. It applies monthly and it can get up to 25% of your tax bill.
This means that if you file on time but pay late, your penalty is 10 times more than the penalty for filing late. In cases, where the IRS is already applying a late filing penalty to your account, it will reduce the late filing penalty to 4.5%. This brings the total monthly penalty to 5%.
Interest Rates for Non-Payment or Underpayment of Taxes
The IRS underpayment interest rates are set each quarter. The interest rates for individual taxpayers are set by taking the federal short-term rate and adding three percentage points.
You will be charged interest as soon as your payment is one day late or if you fail to pay enough in taxes. While you can sometimes abate penalties due to reasonable cause, interest abatement is only granted in rare cases when the has IRS made an error.
Penalties and Interest for Underpayment of Estimated Taxes
Taxpayers whose income is not subject to withholding—including self-employed individuals and independent contractors—may need to make estimated tax payments throughout the year. The taxpayer typically makes these payments in equal quarterly installments, but taxpayers with uneven income during the year may need to make unequal payments.
If you fail to make estimated tax payments or don’t pay enough, the IRS may charge you underpayment penalties and interest. The penalties are calculated based on the amount of the underpayment and the length of the underpayment.
Taxpayers with W-2 income could also be charged the underpayment penalty if they don’t have enough taxes withheld. You can figure your penalty amount using Form 2210, but the IRS will figure it for you and send you a bill in some cases.
There are several safe harbors you can use to avoid underpayment penalties:
- Pay at least 100% of last year’s total tax liability in estimated taxes this year.
- Pay at least 90% of this year’s total tax liability in estimated taxes this year.
- If you owe less than $1,000 in taxes for the entire year, the IRS won’t charge you underpayment penalties.
IRS Audit Penalties
When the IRS examines your tax return during the tax audit process, there’s a good chance you’ll end up owing additional taxes. This examination can also cause you to owe various penalties and interest if you fail the audit.
In many cases, the IRS charges these penalties due to inaccuracies on your return. It’s also possible to face tax fraud penalties if the IRS believes you intentionally violated the tax laws.
Accuracy-Related Penalties
The accuracy-related penalty usually is 20% of the understated tax. The IRS could charge you the accuracy-related penalty for any of the following reasons:
- Negligence, including a failure to use proper care when preparing your tax return
- Intentional disregard of the tax laws
- Substantially understating your income tax liability
- Substantially misstating the value of the property (this can result in a 40% penalty for gross valuation misstatements)
Dishonored Check Penalty
If you pay the IRS with a check or other form of payment that the bank dishonors, the IRS will charge a penalty of 2% of the amount of the check. For payments less than $1,250, the dishonored check penalty is the lower of $25 or the amount of the check.
Tax Fraud Penalties
Tax fraud is an intentional violation of the tax laws to avoid paying taxes. The IRS has the burden to prove that the taxpayer committed tax fraud.
The general civil tax fraud is 75% of the understated tax. The taxpayer will also owe the back taxes, interest, and possibly other tax penalties.
The fraudulent failure to file penalty is another severe tax fraud penalty. This penalty equals 15% of the tax due per month, with a maximum of 75% of the tax due. This penalty is used instead of the general failure to file penalty when a taxpayer has a history of non-filing or otherwise shows that they intentionally failed to file their tax returns.
Tax Evasion Penalties
Tax evasion is a willful attempt to evade or defeat any tax. It can result in up to 5 years in prison and a $100,000 fine ($500,000 for a corporation).
Other criminal tax penalties include the following:
- Up to 3 years in jail and $100,000 in fines for filing a fraudulent tax return
- One year in jail and $25,000 in fines for willfully failing to pay estimated taxes
- One year in jail and $25,000 for the fraudulent failure to file a tax return
A taxpayer can also face both civil and criminal penalties for the same actions.
Tax Preparer Penalties
Tax preparers have a duty to complete their clients’ returns correctly and to perform a reasonable amount of due dilgence about the information they receive from their clients. If a preparer makes a significant error on a return, they can face penalties. Like other penalties, the IRS charges a range of fines depending on the specifics of the situation.
Early Withdrawal Penalties for Retirement Accounts
If you withdraw funds from your 401(k) or traditional IRA before you reach retirement age, you will incur a penalty for early withdrawal. Typically, the penalty is 10% of the funds withdrawn, and then, you also pay income tax on the money. But if you meet certain criteria (such as using the money for a qualified expense and agreeing to pay it back), you may be able to avoid the penalty.
Penalties for Business Tax Payers
Businesses can face many of the above penalties, such as penalties for paying or filing taxes late. However, businesses also face unique penalties such as penalties related to misclassifying employees and contractors or Trust Fund Recovery Penalties for not paying payroll taxes.
IRS Penalty Abatement
You may be able to request relief from certain IRS penalties. The IRS may grant penalty abatement due to reasonable cause, statutory exception, or using the first-time abatement (FTA) waiver.
You can use FTA for a single tax period. The taxpayer must have no penalties in the past three years and be in full tax compliance.
You can use reasonable cause abatement in a variety of situations. Typically, these cases involve natural disasters, illness, or some other event that was out of the taxpayer’s control and caused them to miss a payment or filing deadline.
Penalty relief can also be based on statutory exceptions found in the Internal Revenue Code. One common statutory exception is penalty relief given when the IRS gives erroneous advice to a taxpayer that causes a tax penalty.
Tax Relief Process
