If you don’t submit your tax returns or pay your taxes on time, you might face severe consequences. Careless mistakes can result in tax penalties as well, while intentional tax fraud or evasion can result in harsh penalties. A tax penalty may be owed by taxpayers who fail to fulfill their tax responsibilities. There are several situations where IRS penalties are imposed, such as failing to:
- Immediately submit your tax return
- Pay any taxes you owe promptly and correctly.
- Create a precise tax return.
- Providing correct data about returns
Some of the common reasons that can make you face penalty consequences are penalty for filing taxes late, IRS late payment penalty, underpayment penalty, and many more. If you fail to pay a penalty in full, the internal revenue service (IRS) may apply interest. They assess certain penalties every month until you pay the whole amount you owe. The article will help you Know the different kinds of Penalties, what to do if you receive one, and how to prevent receiving one.
Table of Contents
How to Determine if You Owe a Penalty
A notification or letter is mailed to you when IRS assesses a penalty against you. Your next steps will be outlined in the letter or notice, along with information on the fine and the charge’s origin. An identifying number appears on these notices and letters. You should confirm the accuracy of the information in your letter or notification. A tax penalty will not be imposed if the problem stated in the notice is resolved by you.
IRS penalties
1. Failure to Pay Penalty (H3)
If you don’t pay the tax you submit on your tax return by the due date or an authorized extended due date, the Failure to Pay Penalty is applicable. A percentage of the taxes you didn’t pay is used to calculate the penalty you must pay.
This Penalty is calculated as follows:
- The length of time your past-due taxes go unpaid determines how much of a failure to pay penalty you will incur. Unpaid tax is the entire amount of tax that must be reported on your return minus amounts withheld, anticipated tax payments, and permitted refundable credits.
- The Failure to Pay penalty cannot be more than 25% of your outstanding taxes.
2. Failure to File Penalty (H3)
If your tax return is not submitted by the deadline, you will be subject to the Failure to File Penalty. In other words, this is a penalty for filing taxes late.
This Penalty is calculated as follows:
- For each month or portion of a month that a tax return is late, there is a failure to file a penalty of 5% of the unpaid taxes. The penalty cannot be more than 25% of your overdue taxes.
- If a Failure to File and a Failure to Pay Penalty is assessed in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty for that month, resulting in a combined penalty of 5% for each full or partial month that your return was late.
- Furthermore, the Failure to Pay Penalty continues to apply up to a maximum of 25% of the unpaid tax as of the due date until the tax is paid. If after 5 months you still haven’t paid, the Failure to File Penalty will reach its maximum.
- For tax returns that must be submitted in 2020, 2021, and 2022, the minimum Failure to File Penalty is $435, or 100% of the tax that must be stated on the return, whichever is less. If your return was more than 60 days late, there is also a $1,000 maximum Failure to File Penalty.
3. Accuracy-Related Penalty (H3)
If you underpay the tax that is to be reported on your return, an underpayment penalty is imposed. Underpayment may be from underreporting your income or from claiming credits or deductions for which you are ineligible.
The Accuracy-Related penalty is calculated as follows:
- The Accuracy-Related Penalty is equal to 20% of the part of the underpayment of tax that resulted from carelessness or contempt of the rules or regulations in situations of ignorance or disregard.
- The Accuracy-Related Penalty is equal to 20% of the part of the underpaid tax that was underestimated on the return in circumstances where there was a significant understatement.
4. Failure to Deposit Penalty (H3)
Employers who do not make employment tax payments on time, in the right amount, and in the right way are subjected to the Failure to Deposit Penalty.
Taxes that are paid by the employer include the federal income tax, Social Security and Medicare contributions, and the federal unemployment tax. Every month or every two weeks, employers are required to deposit employment taxes to the IRS.
How the Penalty is Calculated:
- Based on the number of calendar days that have passed since your deposit’s due date, IRS determines how much of a failure to deposit penalty you will incur.
- The penalties do not stack up. For instance, if your deposit is more than 15 calendar days late, IRS does not tack on a 10% late fee in addition to the previous 2 percent and 5% late fees. Instead, in this case, your new overall fine would be 10%.
| Number. of Days your Deposite has delayed | Penalty Amount |
| 1-5 days | 2% of the unpaid deposit |
| 6-15 days | 5% of the unpaid deposit |
| More than 15 days | 10 % of the unpaid deposit |
| More than ten calendar days following your initial notification/ letter or when you get a notification or letter requesting urgent payment | 15 % of the unpaid deposit |
5. Dishonored Check Penalty (H3)
When your bank returns your faulty check or electronic payment and deems the tax amount you owe to be unpaid. If you don’t have enough money in your bank account to repay the payment you made for the tax you owe the Dishonored Check Penalty will be applied.
How the Penalty is Calculated:
- The amount of the bad check or electronic payment is used to determine how much the dishonored check penalty will be.
| Insufficient Funds or a Bad Check Amount | Penalty Amount |
| Less than $1,250 | whichever is less, $25 or the payment amount |
| $1,250 or more | 2% of the payment amount |
Penalty Interest: Tax Penalties are subject to interest charges. Depending on the kind of punishment, IRS starts charging interest at different times. Until you make complete payment on your debt, interest will increase the amount you owe.
Conclusion
You can avoid tax penalties if you submit accurate returns, pay your taxes by the deadline, and provide all the information concerning returns on time. If you are unable to do so, you may request an extension of time to file or a payment schedule. Apply for a filing extension if you need additional time to prepare your tax return. You can pay the estimated tax penalty you owe, over time by using a payment plan as well. However, you must keep track of these things and try to make these important payments on time to avoid the consequences and make your future bright and stress-free.