To make a mistake when filing a tax return or paying a tax debt is a fairly common thing that can happen to anyone. However, it is important to understand that these mistakes can result in an IRS penalty.
Learn more about the different types of penalties, what to do if you receive a penalty, and how to avoid getting one.
When can the IRS charge a penalty?
- The IRS can charge a penalty if:
- You file your tax return late.
- You do not pay taxes due on time.
- You do not prepare an accurate statement.
- You do not provide accurate information on returns.
In addition, the IRS may charge interest on a penalty if it is not paid in full. If necessary, the IRS will charge you a few penalties each month until you pay the full amount due.
Types of Penalties
There are several types of penalties that the IRS can charge, including:
Information Return
It applies to taxpayers who fail to file their required information return or payee statement correctly by the due date. If you owe a penalty, the IRS will mail you Notice 972CG and charge you monthly interest until you pay the full amount.
Failure to File
This penalty applies when you do not file your tax return before the due date. The amount of the penalty that you must pay is a percentage of the taxes that you did not pay on time.
Failure to Pay
This type of penalty applies when the taxpayer does not pay the tax due before the due date. The penalty you must pay is a percentage of the taxes you did not pay.
Accuracy-Related
The IRS can charge a penalty when the taxpayer does not claim all of their income or when they claim deductions or credits for which they do not qualify.
Tax Preparer Penalties
These penalties apply to tax return preparers who engage in misconduct.
Failure to Deposit
This penalty is charged when employers do not make employment tax deposits on time, in the right amount or in the right way. The penalty you must pay is a percentage of the taxes you did not deposit accurately or on time.
Dishonored checks
The IRS charges this penalty when you don’t have enough money in your bank account to pay the taxes you owe and your bank dishonors and returns your check or other form of payment.
Underpayment of estimated tax by corporations
It applies when you don’t pay estimated tax accurately or on time for a corporation.
Underpayment of estimated tax by individuals
Unlike the previous one, this penalty applies when you don’t pay the estimated tax accurately or on time as an individual.
How do I know I owe a penalty?
If the IRS charges you a penalty, it will send you a notice or letter by mail. The notice or letter will tell you about the penalty, the reason for the penalty, and what to do next.
How can I pay an IRS penalty?
If you have received a letter or notice from the IRS stating that you must pay a penalty, the first thing you should do is verify that the information in your notice or letter is correct. If so, you must pay your penalty in full to prevent future penalties and interest from accruing.
You can usually pay online or by mail with a check.
Can the IRS remove or reduce a penalty?
If you acted in good faith and can show a reasonable cause why you were unable to meet your tax obligations, the IRS may consider reducing or eliminating a penalty. However, the law states that interest cannot be eliminated or reduced unless the penalty is eliminated or reduced.
You can check the Penalty Relief page to determine if you qualify.
How to avoid IRS penalties?
The best way to avoid an IRS penalty is to file accurate tax returns, pay your taxes before the due date, and file required information returns on time.
If for some reason you are unable to do so, you have two options:
Request an Extension of Time to File
If you need more time to prepare your tax return, you can ask the IRS for an extension to file. Please note that this does not give you an extension of time to pay.
Apply for a Payment Plan
If you can’t pay your taxes or penalties in full on time, pay what you can now and ask for a payment plan. Setting up a payment plan with the IRS can help you reduce future penalties. If you need help with a penalty, you can call the phone number on the notice or letter you received from the IRS. If you did not receive a letter or notice, please use telephone assistance.