4 Common IRS Penalties & How to Avoid Them

 

You know the old line about the inevitability of death and taxes? It’s still true. What isn’t inevitable, however, is the need to pay penalties to the IRS. It happens, but it doesn’t have to, and the main reason that it does is because taxpayers don’t educate themselves about the rules. When you get hit with an IRS penalty, it adds on to a number that you already wish you didn’t have to pay.

 

To ensure that you get through tax season without unnecessary costs and aggravation, here’s a list of the tax penalties that the IRS most frequently assesses against taxpayers.

 

 

 

 

     1. Penalty for underpaying estimated tax payments

     2. Penalty for taking early withdrawals from tax-advantaged retirement accounts, including IRA accounts           and 401(k) accounts

     3. Penalty for failing to file, or for filing your required tax return after the designated due date

     4. Penalty for failing to pay your taxes on time

 

 

 

Let’s take a deep dive into each. The more you know, the better you’ll understand how to avoid these mistakes.

 

 

Who has to submit quarterly estimated taxes? You do if you own a small business. If you’re subject to self-employment tax, then you’re supposed to submit it quarterly. Though this requirement is straightforward, most people may have no familiarity with estimated quarterly taxes, or if they do they may not be in the habit of paying it and have forgotten. Whatever the reason, the penalties for failure to make these payments can add up pretty quickly. This penalty can be 6 percent of your income.

 

 

Having a retirement account is a smart thing to do, and it’s something that the government has encouraged by allowing for the creation of special tax-advantaged vehicles. These tax advantages represent a tremendous incentive and benefit, but they come with strings: until you are 59 ½, you are not permitted to take money out of those accounts prior to retirement without having to have to pay a hefty 10% penalty. So if you’re thinking of using your retirement money to fund your small business, make sure you withhold the additional 10% tax.

 

 

The tax deadline is set in stone every year. It’s in the news; it’s on the IRS website and your tax forms. There’s no escaping it, and if you try, then you’re going to get penalized. Some people miss the deadline because they are procrastinators or they just forgot, while others make the mistake of thinking that if they don’t send in paperwork, then they won’t have to pay. Whatever the reason, you’re going to end up getting caught one way or another and having to pay the penalty. Failure to file results in penalties that add up quickly: 4.5% of the tax due will be assessed and added to your tax liability for each month that you’re late, up until you pass the five-month mark and hit the maximum penalty of 22.5%. There is also a minimum penalty amount of smaller of $210 or 100% of your tax due whichever is greater the percentage amount.

 

 

In all fairness, some people don’t file their tax return because they don’t have the money available to pay what they owe. The truth is that the amount that is penalized for failing to file is much more than what you would be penalized if you did file without paying. Though you’re looking at a penalty one way or another, it makes sense to file, even without sending in the money that you owe.

 

There is 0.5% penalty per month for failure to pay taxes on time. One important thing to remember is that the requirement to pay begins on the tax due date – even if you request an extension for filing your return, the clock starts ticking on the non-payment penalty on the tax deadline date. If you’re at all able to send in money, then do so – even if it’s only a portion of what you owe.

 

 

 

Though the list of penalties provided here is not exhaustive, it gives you a good idea of where you can get into trouble, as well as how to avoid trouble.

 

The Where To Start ebook covers all of the types of taxes that business owners may have to pay. Don’t wait, grab your copy today by clicking HERE !

 

 

Regina H Rudolph, CPA