Did you know the IRS can penalize you for a variety of reasons? For instance, you can receive a tax penalty for not having health insurance, for filing what the IRS deems a frivolous tax return, and for a variety of retirement account inactions or actions. However, most taxpayers usually encounter 3 common offenses:
- Not paying what is owed
- Not filing an income tax return, at all
- Not paying enough tax through the year
If you don’t file a return or an extension by the April deadline then the penalty for not filing will start the very next day. The penalty will continue to grow at 5% per month of any tax balance that is due. The 5% penalty applies to any portion of the month and is not pro-rated.
However, the penalty does max out at 25% of your unpaid taxes. Still, 25% is a pretty hefty fee to pay.
A lot of taxpayers will avoid filing their return if they can’t afford to pay their tax liability. That’s not smart. The IRS considers not filing your return a more serious offense.
Those unpaid liabilities have a penalty, too. Even if you file your return or an extension, but do not pay what you owe in full then you’ll face a penalty of 0.5% of the amount due. Again, it’s added every month that your tax bill is not paid in full. It can grow until it reaches 25% of your tax liability.
Taxes are collected on a pay-as-you-earn system. So if you do not pay enough in as you earn it then will be hit with an underpayment penalty. Most Americans comply with this by having income tax withheld from their paychecks. But if you’re an independent contractor or have a side job to your regular employment then you’re responsible for covering the additional taxes due.
To avoid underpaying your taxes you can pay an estimated tax amount throughout the year.
If you have questions on avoiding the 3 common tax penalties, give us a call at 573-686-3053.