IRS Penalties

Common IRS Penalties

The IRS issues penalties for several reasons, including:

• Failure to File – If you don’t file your tax return by the due date, the IRS may charge you a penalty of 5% of the unpaid taxes per month, up to 25% of your total tax bill.
• Failure to Pay – If you don’t pay your taxes on time, you’ll be charged 0.5% of the unpaid taxes per month, up to 25% of the total owed.
• Underpayment of Estimated Taxes – If you’re self-employed or don’t have enough taxes withheld, you may face penalties for underpaying your estimated taxes.
• Accuracy-Related Penalty – If you make substantial errors or underreport income, the IRS may impose a 20% penalty on the underpaid amount.
• Fraudulent Filing – If the IRS determines that you intentionally filed a fraudulent tax return, the penalties can be severe—up to 75% of the underreported tax.
• Failure to Deposit Payroll Taxes – Businesses that fail to deposit payroll taxes on time may be hit with penalties starting at 2% and increasing to 15% depending on how late the deposit is made.

How to Avoid IRS Penalties

The best way to avoid IRS penalties is to follow tax rules carefully and ensure you meet all deadlines. Some strategies include:

• File on Time – Even if you can’t pay the full amount, file your return by the deadline to avoid failure-to-file penalties.
• Pay What You Can – The IRS charges lower penalties for late payments than for not filing at all. Paying at least a portion of your tax bill can help reduce your penalties.
• Use the IRS Payment Plan – If you can’t pay your full tax bill at once, setting up a payment plan with the IRS can help you avoid additional penalties and interest.
• Make Estimated Tax Payments – If you’re self-employed, make quarterly estimated tax payments to prevent underpayment penalties.
• Keep Good Records – Maintain accurate records of income, expenses, and deductions to prevent errors that could trigger penalties.
• Consult a Tax Professional – Tax laws can be complicated, and working with an accountant or tax preparer can help you navigate them correctly.

What to Do If You Receive an IRS Penalty

If you receive a penalty notice from the IRS, don’t panic. You have options to resolve it:

• Review the Notice – Carefully read the IRS notice to understand why the penalty was issued and what action is required.
• Request an Abatement – The IRS may waive your penalty if you have a valid reason, such as a serious illness, natural disaster, or first-time offense.
• Set Up a Payment Plan – If you owe a large amount, you can request a payment plan to spread out the payments over time.
• Correct the Mistake – If the penalty resulted from a filing error, amending your tax return may help reduce or remove the penalty.
• Dispute the Penalty – If you believe the penalty was issued in error, you can appeal it through the IRS’s administrative process.

Accountant vs. DIY Tax Filing: Which Is Better?

When it comes to handling taxes and avoiding IRS penalties, you can either do it yourself or hire a professional accountant. Here’s how the two compare:

• Accuracy – Accountants are trained in tax laws and can ensure that your return is accurate, reducing the risk of IRS penalties. Filing on your own increases the chances of mistakes.
• Time and Effort – Doing your own taxes can be time-consuming, especially if you have a complicated return. An accountant saves you time and stress.
• Tax Savings – A professional accountant can identify deductions and credits you might miss, potentially lowering your tax bill.
• Handling IRS Issues – If you receive a penalty or audit notice, an accountant can represent you and help resolve the issue efficiently.
• Cost – Filing your own taxes is cheaper upfront, but an accountant may save you money in the long run by avoiding penalties and maximizing deductions.