- Inaccuracies
The IRS can hit you with a 20% penalty if it
finds you were negligent (unreasonably careless) or substantially understated your taxes.
You typically incur this "accuracy related" penalty when you can’t prove a
deduction on an audit, or you forgot to report all of your income and the IRS discovers
it.
- Civil Fraud
If the IRS finds that you underreported your
income with a fraudulent intent (it doesn’t look like a mistake to the IRS), you can
be fined 75% of the amount of the resulting tax deficiency. Don’t worry too much
about this civil (non-criminal) tax fraud penalty -- it’s imposed in less than 2% of
all audits. (You may also be charged with the crime of tax fraud, which is even rarer).
- Failure to Pay on Time
The IRS usually adds a penalty of
1/2% to 1% per month to an income tax bill that’s not paid on time. This penalty is
automatically tacked on by the IRS computer whenever you file a return but don’t pay
the full amount owed, or pay it late.
Late payment penalties for failing to make payroll tax deposits on time are much
higher.
- Filing Late
If you’re late in filing certain income
tax returns or other forms, the IRS can penalize you an additional 5% per month on any
balance due. However, this penalty can be applied only for the first five months following
the return’s due date, up to a 25% maximum charge.
- Filing and Paying Late
A special rule applies if you both
file late and underpay. The IRS can (and probably will) impose a "combined
penalty" of 25% of the amount owed if you don’t pay in the first five months
after the return and tax are due. After five months, the "failure to pay"
penalty continues at 1/2% per month until the two penalties reach a combined maximum of
47-1/2%. This is a slightly lower (2-1/2% less overall) penalty than if the two penalties
were applied separately.
IRS penalties are "stackable." Late filing and paying penalties can be
imposed by the IRS in addition to any other penalties, such as for fraud and filing an
inaccurate return. Congress and the IRS believes the more the merrier when it comes to
penalizing taxpayers.
- Underpaying Estimated Taxes
Undoubtedly, many of you will
get hit with the estimated tax penalty. I know I have been, for whatever that is worth to
you. All self-employed individuals must estimate their income tax for the year and pay it
in quarterly installments throughout the year. You must come pretty close to paying
everything you will owe, although you don’t have to guess the amount precisely. Here
are the rules:
If you earn less than $150,000, your quarterly tax payments must equal at least 90% of
your final income tax bill, or at least 100% of your prior year’s tax bill.
If you earn more than $150,000, you must pay at least 110% of your
last year’s tax bill in estimated payments or risk the underpayment penalty on
whatever amount you come up short.
The penalty for not complying is calculated at an
annual rate (announced quarterly) on the amount
that was underpaid for each quarter. Quarterly payments should be equal -- you can’t
play catch-up with larger payments later in the year and still avoid this penalty.
