Taxes are a source of confusion for many people and a cause of stress for some of us especially those who owe the IRS. American taxpayers owed more than $114 billion in back taxes, and interest from the 2020 tax filings. This does not include the tax bills that piled up in 2021 which are just starting to get reported.

Whether or not you owe money to the IRS, it’s essential to understand the basic tax fees and penalties that the IRS can charge you. It is also significant to understand how to deal with these kinds of stressful scenarios so you do not get buried in tax bills.

Common IRS Penalties

In 2022, the tax deadline was moved to April 18 or 19 depending on your location. There is some relief from the extension but it should not be a reason to delay filing your taxes. This applies to any taxpayer who files a paper return. The IRS is still experiencing a backlog from last year so filing manually and waiting for the deadline can result in unforeseen penalties. These could include at least one of the following:

1. Late Payment or Failure to Pay

Late payment or Failure to Pay penalty is a monthly penalty and is assessed as 0.5% of the unpaid taxes every month until you pay the balance in full. The penalty will be assessed every month until it reaches 25% of the unpaid taxes. If your penalty reaches 25% of your balance, the IRS will find other avenues to charge the fee such as wage garnishment or lien on the property.

If the taxpayer arranges a payment installment with the IRS, the penalty can be lowered to 0.255 per month. The monthly installment to pay the tax bill is within a certain period. Sometimes, the IRS can be flexible with these payment agreements. However, agreements cannot go beyond 10 years which is determined as the statute of limitations for collecting taxes.

What if you’re not eligible for a tax refund or don’t owe taxes?

Taxpayers who are not expecting a tax refund or who don’t owe back taxes are still required to file their tax returns. Failure to do so risks penalties and interest on these penalties if unpaid. For those who do not have taxable income, the IRS recommends filing a $0 tax return to prevent this from happening. This figure is also used in calculations for social security payments which the IRS reports to the Social Security Administration.

2. Failure to File

If a taxpayer files their tax return beyond the due date, they will be charged a failure to file penalty. This penalty is 5% of the tax bill for each month that the tax return is filed late. A lot of American taxpayers are confused about what happens if they cannot pay their taxes. The IRS can work with people who struggle to pay their taxes but they are less lenient on due dates for filing.

If a taxpayer files their tax returns late and cannot afford to pay, they will need to pay 5%. 0.5% goes to the late penalty while the remaining 4.5% goes toward the failure to file fee. Both of these penalties will accrue interest until they are paid off. The failure to file a penalty also has a maximum of 25%.

Request for an Extension

If you foresee that you will be late in filing taxes and need more time, it’s better to request an extension instead of asking forgiveness for a late filing. The former is also easier. This can be done by completing and mailing Form 4858. You can get six months extension to complete and file your tax returns without any penalties.

3. Underpayment

People who are employed and whose only source of income is employment have their employers withhold federal income tax from their monthly paychecks. They are unlikely to underpay when they file their tax returns.

However, individuals whose earnings come from multiple sources such as entrepreneurs and freelancers are subject to self-employment tax. Unlike an employee with taxes withheld, self-employed taxpayers are required to estimate their tax payments per quarter. Failure to do so leads to a huge tax bill or tax penalty during filing season.

In other words, an underpayment penalty is a penalty fee charged to taxpayers who did not pay enough withholding tax or estimated payment. Underpaying taxpayers are required to complete Form 2210 to evaluate any penalties they owe.

There are some situations where this penalty can be waived:

• The total tax owed is below $1,000

• You paid over 90% of the taxes owed

• You did not owe taxes in the previous were

• Special circumstances like natural disasters

 

4. Fraudulent Returns

Attempting to evade tax law or defrauding the IRS willfully is referred to as income tax fraud. This is a serious crime with hefty fines and imprisonment. But before you stress over the possibility of going to jail for incorrect tax returns, you should know that the IRS can understand regular taxpayers. They can determine between negligence and tax fraud. The IRS knows if it was an honest mistake or a serious attempt to commit fraud.

Below are some signs of income tax fraud:

• Falsifying personal or business expenses

• Falsifying documents

• Several sets of financial books

• Underreporting income

• Fake social security number

• Transferring or concealing income

• Overstating deductions and exemptions

Committing income fraud leads to civil and criminal penalties and these can vary depending on the type and gravity of the act. If someone attempts to evade paying taxes, they will be subject to a maximum of 5 years imprisonment, a maximum of $250,000 fine for individuals or $500,000 for business, or both.

Dealing with Tax Penalties

How do you deal with IRS tax penalties aside from paying them flat out? If you’re only option is to pay late fees because the deadline has passed, there are some options available for you. If this is the first time you are late in filing or paying and have a clean tax history in the previous years, you can request a first-time penalty abatement. This will waive all the penalties incurred by late filing or payment.

Statutory exemption, which is similar to payment abatement, can also be granted in certain circumstances. This type of relief will abate or waive penalties if your tax owed is below $1,000, you are newly retired or disabled, or you have no liabilities for the previous year.

Avoid Getting Penalties

To avoid penalties, remember to always pay your taxes on time. If you have accumulated quite a huge tax bill, you can negotiate an installment schedule with the IRS. With this agreement, you can pay your tax bill in smaller and more manageable payments every month. First, the IRS will determine how much you can actually afford to pay monthly. Your income and expenses will be factored into the computation. Then, the IRS will determine a timeframe appropriate for the installment plan.

If you pay on time, you don’t need to worry about receiving a levy or lien on your assets but you will still need to pay interest for the balance remaining. You will also continue to accrue penalties until your pay your taxes in full.

Get an Expert

No one wants to deal with tax penalties especially when you have a huge tax bill for the deadline. A tax specialist can assist you in managing your taxes whether you have an unpaid bill or penalties. Although they cannot eliminate your obligations or delinquency records, they can find avenues to get relief on your burdens oftentimes reducing the actual amount you owe.

Tax relief programs are designed by the IRS to reduce tax bills based on someone’s financial situation. These can include tax deductions, tax credits, tax forgiveness, and more. A tax expert understands the process completely and can also stay abreast of all the updates and changes in governing rules. Many tax relief companies offer a free initial consultation where they can find out your situation and determine the services you can qualify for.

Conclusion

With enough preparation, you can prevent yourself from owing money in taxes and getting penalties from the IRS. But there are some situations in life we cannot predict that can prevent you from filing or paying taxes on time. In these cases, it’s important to have a clear understanding of the possible penalties and the available solutions. You may find that you qualify for an extension or first-time penalty abatement. If unsure and the burden is overwhelming, tax relief companies can help you find a manageable solution.