Tax Penalties You Should Avoid

by Brian Huber

The Internal Revenue Service imposes penalties for violations of tax rules. A penalty is assessed on a percentage of your income tax for failure to pay by the due date as well as insufficient tax payments during the year. Larger penalties are enforced for substantial understatement of tax, fraudulent reporting, and filing a frivolous tax return. Giving the IRS a check that your bank later returns earns a bounced check fee.

Late Filing

Failure to file a tax return by the due date leads to a penalty on the amount of tax not paid by the filing deadline. The penalty is normally 5 percent for each month that your return is late, not to exceed 25 percent. The minimum late penalty for filing 60 days after the due date is the lower of $100 or 100 percent of the tax on the return.

Late Payment

Even if you file your tax return on time, failing to pay any tax by the due date results in a penalty of 0.5 percent of the amount owed. This percentage is assessed each month that the tax remains unpaid. You may eliminate this penalty by paying at least 90 percent of your tax liability on time and requesting a six-month extension to file your return and pay the remainder. The penalty is reduced if you have a valid installment payment agreement with the IRS.

Estimated Tax Penalty

The IRS requires that you pay a minimum amount of your tax liability during the year. If you are an employee, your employer withholds tax from your paychecks. If you do not have enough withheld, estimated tax payments are required during the year. This often happens when you have income from which no tax is withheld, such as self-employment activities, interest, dividends, rent, alimony or capital gains. Estimated tax penalties are assessed even if all your tax liability was paid by the return filing deadline.

Penalty for Inaccurate Return

The IRS imposes penalties for substantial understatements as well as for negligence or disregard of tax rules. This assessment is 20 percent of the understated tax amount. An understatement usually occurs from under-reporting income or over-reporting deductions. It may also result from improper calculation of a tax credit. Understatements are considered substantial when they comprise $5,000 or 10 percent of the correct tax — whichever is larger.

Civil Fraud

A penalty amounting to 75 percent of tax underpayment is enforced when the IRS determines that fraud has occurred. Negligence or ignorance of the law is not fraudulent, but a willful act to evade tax is. A fraud penalty only applies to the spouse on a joint tax return when that individual engaged in fraudulent action. The IRS typically refers cases of civil fraud to the Criminal Investigation Division for further inquiry.

Frivolous Tax Return

Penalties of $5,000 are assessed against people filing frivolous tax returns. Such submissions include returns containing insufficient information for accurate tax calculations. A frivolous return may also contain information clearly showing that reported tax is incorrect. The frivolous tax return penalty applies to any act that delays or interferes with administration of tax laws, such as striking out language above the signature line on a return.

Bounced Checks

The IRS imposes a penalty when a check is returned due to insufficient funds. The size of the penalty depends on the check amount. The fee for a bounced check under $1,250 is the amount of the check or $25 — whichever is less. A bounced check larger than $1,250 triggers a penalty of 2.0 percent of the amount of the check.

About the Author

Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.

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