Everything You Need to Know About Tax Penalties
If you’ve ever paid your taxes late or just completely forgotten to file, you may know all too well about the dreaded tax penalties. These penalties are more than a little slap on the wrist, they could cost you hundreds or thousands of dollars if you let them linger. Navigating these penalties can be a tricky subject for most people. It’s important to understand these penalties and how best to avoid incurring them.
There are Four Common Tax Penalties
Failure to Pay Penalties: This type of penalty happens when your taxes are not paid in full by the tax return due date, which is typically April 15, unless the deadline is extended. Failure to pay penalties could result in reoccurring charges on the unpaid portion until the taxes are paid in full.
Failure to File Penalties: This type of penalty happens when you don’t file your tax returns by the return due date, unless the due date is extended, or you ask for and are approved for an extension.
Failure to Pay Proper Estimated Tax: This one is simply not paying enough taxes on the amount due for the year or not having enough taxes withheld from your paycheck.
Dishonored Check: This penalty happens when your bank doesn’t honor your check or other form of payment you submitted to the IRS for tax payments. You could be charged a penalty of 2% of the total amount of the check or $25, whichever is more.
How to Avoid Tax Penalties
Aside from the obvious – file and pay your taxes on time- here are a few other things you can do to avoid tax penalties.
- File for an extension. If you need more time to gather information to prepare a correct return, file for an extension. You will avoid the failure to file penalty and get an additional six months to file (through October 15th). Please note that you can get an extension to file but not an extension to pay – that stays at April 15th so consider an extension payment to avoid a failure to pay penalty.
- Estimate your tax payments. If you are paid unevenly throughout the year because you are gig worker, freelancer, business owner or for some other reason, you can avoid or lower penalties by annualizing your income so you can make uneven payments. Not sure how much to pay in estimates? Talk with an accountant or tax preparer in your area.
- Seek penalty relief. If you do receive a penalty but have a good reason for why you filed late or did not pay your taxes in full, request penalty abatement. Just make sure to keep good records regarding the reason as the IRS gives more weight to proof of any roadblocks that kept you from filing or paying on time.
- Pay your taxes. Penalties are often calculated on the amount of taxes due. So, each month penalties are assessed based on the balance due, so any payments which are applied to taxes will reduce any future penalty assessments.
While understanding tax penalties is important, it is much more important to try to avoid them whenever possible. Filing and paying on time and seeking help from a tax professional is a good place to start.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your unpaid taxes, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043