IRS Penalties for Late Returns, Payments, and More

The federal tax code is quite complex. Therefore, it shouldn’t be surprising that there are plenty of opportunities to fail to comply with it. If this happens, you could potentially face one or more tax penalties. These can range from minor monetary penalties to prison time.

Luckily, most tax penalties don’t end up with you getting convicted of a crime. Despite this fact, you still want to take the possibility of tax penalties seriously. Let’s take a look at some of the more common tax penalties you’re likely to face if you don’t correctly do your taxes. If you’re already dealing with penalties and want help now, contact us today at Damien’s Law. 

Penalties for Unpaid Taxes 

When most people think of tax penalties, they’re probably thinking of this one. The failure to pay penalty is a penalty imposed because you didn’t pay your taxes on time. The penalty is a percentage of the tax amount you owe the IRS. The failure to pay penalty can apply to taxes shown on your tax return but not paid or taxes you didn’t pay because you didn’t report them on your tax return.

The penalty for not paying the taxes on your tax return is 0.5% of the unpaid taxes for every month you don’t pay your taxes. This percentage will therefore continue to rise the longer you go without paying your taxes. However, this failure to pay penalty will not exceed 25% of your unpaid tax bill. This upper limit only applies if the penalty is due to you not paying the taxes reported on your return. 

For example, if you owe $1,000 in taxes, the late payment penalty will be $50 for the first month you are late. Then, it can get up to $250. Note that this penalty increases to 1% after a certain period of delinquency. It gets reduced to 0.25%, however, if you set up an installment agreement. 

Penalties for Filing Your Taxes Late 

If you file your tax returns late to the IRS, you have to pay a failure to file penalty. Yes, the name of this penalty can be misleading, as not filing your tax returns is different than filing them late, but this is what the IRS calls this penalty.

For most taxpayers, the failure to file penalty is a percentage of the taxes you owe but don’t report on time. The percentage is 5% per month of the unpaid tax balance, but the penalty won’t exceed 25% of your unpaid tax bill. If your return is more than 60 days late, your penalty will be the lesser of either $485 or 100% of the tax required to be shown on your tax return.

There are a few things to keep in mind when it comes to the failure to file penalty. First, the amount of the penalty depends on how late your return gets filed.

Second, because a tax return filed late usually means paying any taxes owed late, the failure to file and failure to pay penalties can be applied at the same time. However, these combined penalties will not exceed 5% per month of the unpaid tax balance. Instead, the failure to file penalty will only be 4.5% each month and the failure to pay penalty will be the usual 0.5% per month.

If you do not owe any taxes for a given tax year, you cannot be charged a failure to file penalty. In these situations, you still want to file your taxes on time to ensure you receive your tax refund as quickly as possible. If you wait too long to file a return (three years), you could lose any potential tax refund. 

Underpayment Tax Penalty 

The IRS requires most taxpayers to pay their income taxes throughout the year, as they earn income. For most people, this usually means money gets withheld from each paycheck issued by their employer. However, some taxpayers, like self-employed individuals and corporations, may make estimated tax payments each quarter.

Generally speaking, individuals (including S-corporation shareholders, sole proprietors, and partners) must make quarterly estimated tax payments if they expect to owe $1,000 or more when they file a return at the end of the tax year. For corporations, this quarterly estimated tax requirement applies if they expect to owe $500 or more when filing a return.

Although these are estimated tax payments, the IRS expects them to add up to an amount that’s somewhere in the ballpark of what the taxpayer owes. If your estimated tax payments are notably less than what you owe at the end of the year, you could have to pay an underpayment penalty.

The underpayment penalty can vary, as it depends on the amount of the underpayment, the period when the underpayment was due and underpaid, and the applicable quarterly IRS underpayment interest rate. The underpayment penalty typically ends up being the same as the failure to pay penalty, or 0.5% of the unpaid amount per month, up to 25% of the outstanding tax balance.

You don’t have to pay the underpayment penalty as an individual taxpayer if either situation applies:

• Your tax return indicates you owe less than $1,000 to the IRS.
• Your estimated tax payments during the year are equal to at least 90% of the tax indicated on your return or 100% of the tax indicated on last year’s return, whichever is less. 

Accuracy-Related Tax Penalties

This penalty applies because the amount of tax your return says you owe is wrong. If you’re filing as an individual, there are two main accuracy-related penalties you could potentially face.

First, there’s the negligence or disregard for the rules or regulations penalty. This penalty applies if the mistake on your tax return is because you negligently, recklessly, carelessly, or intentionally disregarded the applicable tax rules or regulations.

Second, there’s the substantial understatement of income tax penalty. You could have to pay this penalty if you understate your tax liability by the greater of either 10% of the tax required to be shown on your return or $5,000.

In either situation, the penalty amount is 20% of the tax underpayment. This 20% penalty also applies if the accuracy-related penalty stems from a substantial overstatement of pension liabilities or any substantial income tax valuation misstatement. 

Tax Fraud Penalties 

Tax fraud involves a taxpayer intentionally providing misleading or incorrect information to reduce the taxes they would otherwise have to pay. Penalties for tax fraud are more severe than other types of tax penalties because tax fraud involves knowingly trying to misinform the IRS.

It’s one thing to reasonably believe you can take a tax deduction and later find out you can’t. It’s totally different to claim a tax deduction you know you aren’t entitled to and falsify information on your tax return to support the deduction you can’t claim. Keep in mind that neither ignorance of the law nor negligence in applying the correct tax law constitutes tax fraud.

There are two types of tax fraud penalties. Civil tax fraud penalties only involve money, but this penalty can be as high as 75% of the unpaid tax balance. Criminal tax fraud penalties involve not just a monetary fine, but potential prison time. Depending on the offense, criminal tax fraud could result in fines of up to $500,000 and up to three years in prison. One of the most common sources of criminal tax penalties is tax evasion. Tax evasion penalties could result in up to five years of prison time and $100,000 in penalties for individuals and up to $500,000 in penalties for corporations.

Criminal Tax Penalties

Criminal tax penalties vary based on the type of tax crime, as well as extenuating factors and circumstances. That being said, if you commit the following tax crimes, you (as an individual) might face the following penalties:

• Filing a fraudulent tax return: Up to three years in prison and up to $100,000 in fines.
• Tax evasion: Up to five years in prison and up to $100,000 in fines.
• Intentionally not paying (or underpaying) estimated taxes: Up to one year in prison and up to $25,000 in fines.
• Intentionally not filing a tax return: Up to one year in prison and up to $25,000 fines. This usually does not result in criminal penalties, just civil penalties. 

Penalties for Bounced Checks or Other Forms of Payment Penalties

If you make a tax payment to the IRS using a check that bounces, you could have to pay a penalty to the IRS. This penalty also applies if you use some other payment method that withdraws money from your bank account and you don’t have enough money in your bank account to make the payment.

This is the dishonored check or other form of payment penalty, and its amount depends on the size of the dishonored payment amount. If the payment was less than $1,250, the penalty is equal to the lesser of the payment amount or $25. If the payment was $1,250 or more, then the penalty is equal to 2% of the payment amount. 

Early Withdrawal Penalties 

Most retirement accounts that enjoy certain tax benefits, such as a 401(k) or IRA, will impose an early withdrawal penalty if you take money from the account too early. Specifically, if you withdraw money before reaching the age of 59 ½ years, you could have to pay a 10% early withdrawal penalty.

This 10% applies to the amount withdrawn. This 10% penalty applies in addition to the “regular” income tax you pay on the withdrawal amount. There are exceptions to the early withdrawal penalty, such as qualified birth or adoption expenses, death of the retirement account owner, or qualified education expenses.

Tax Audit Penalties

There really isn’t a tax penalty for tax audits. But if during the audit process the IRS revenue agent, tax compliance officer, or tax examiner finds a problem with your taxes, you could face one or more tax penalties, such as those discussed in this article. 

Penalties Relating to Foreign Transactions and Accounts

If you own a foreign financial account or engage in foreign transactions, you may have certain reporting obligations. These include filing the appropriate International Information Returns to the IRS.

If you fail to comply with these requirements, you could face penalties. The amounts of these penalties vary, depending on the type of tax return you filed and the information you needed to provide. The most significant penalties in this category are the FBAR penalty and the penalty for not reporting specified foreign assets on Form 8938.

Penalties for Unfiled Tax Returns

The penalties for not filing your tax return range from civil monetary penalties to criminal fraud charges. You may also incur personal consequences such as not being able to prove your income for a loan. Even if you aren’t required to file, you may be able to get a refund if you file.

Interest on IRS Tax Penalties

The IRS will charge you interest for unpaid penalties. The exact interest rate changes each quarter and is based on current market conditions. These interest rates apply in most of the tax penalty situations discussed in this article. Corporations may face higher interest rates than individuals.

Tax Penalty Relief Options

In limited situations, the IRS will be willing to reduce or remove certain penalties if they’re due to factors beyond your control and/or you acted in good faith to correct or avoid a mistake that led to the penalty. Penalties typically eligible for penalty relief include:

• Failure to file
• Failure to pay
• Accuracy-related
• Dishonored check
• Underpayment of estimated tax

The three main types of IRS penalty relief are administrative waiver, reasonable cause, and statutory exception.

Administrative Waiver 

First Time Abate (aka: penalty abatement) is the most common form of administrative waiver. It applies if you have filed all required tax returns (within the last three years) and the IRS didn’t impose any other penalties on you (or if they did, those penalties were removed for reasons other than First Time Abate). First Time Abate penalty relief is available if the IRS applied a failure to pay, a failure to deposit, or a failure to file penalty on you.

Reasonable Cause

The reasonable cause form of penalty relief applies if you acted in good faith and in a reasonable manner. Depending on the penalty you’re trying to remove, this could refer to situations where you took reasonable care to comply with your tax obligations, but due to unforeseen circumstances such as a death or serious illness, you could not meet those obligations.

For example, your electronic tax filing being late due to the IRS’ computer system being down would likely qualify for reasonable cause penalty relief if the IRS levied a failure to file penalty on you.

Statutory Exception 

This form of penalty relief exists because there’s a tax law that provides for the penalty relief. For instance, there could be a regulation that says the IRS will not impose a tax penalty if certain conditions apply, such as:

• You engaged in military operations in a combat zone.
• You lived in a federal disaster area.
• Your mistake was the result of the IRS giving you incorrect advice.
• You mailed a tax filing on time, but it arrived late due to no fault of your own.

How an IRS Tax Penalty Attorney Can Help

By now, you understand the various tax penalties you could potentially face, as well as what they could cost you. In many of these situations, these penalties aren’t a big deal and you can handle them on your own. But if you’re facing significant monetary penalties or even criminal liability, then it’s probably worth talking to a tax lawyer.

The tax professionals at the Damiens Law Firm can help reduce or even avoid some of these penalties. We have experience handling these types of cases and will be more than happy to see how we can help you with a free consultation.