To paraphrase Elizabeth Barrett Browning, “How does the IRS fine thee? Let me count the ways.” In fact, according to H&R Block, there are almost 150 penalties in the IRS Code. Two of those are responsible for 70% of all penalties:
- 56%-Failure to pay taxes on time
- 14%-Failure to file a return on time
Failure to Pay
When you fail to pay the tax you owe by the due date, the penalty can be 0.25%-25% of the unpaid tax, plus interest. The IRS has a long description of what happens when you file to pay on time that you can find here if you’re really want to read it, but the breakdown looks like this:
- The standard penalty is 0.5% of the unpaid tax for each month or partial month that payment is late.
- If you filed an individual tax return on time and have an approved payment plan, the penalty is reduced to 0.25% per month.
- If you receive a notice from the IRS about their intent to levy and you fail to pay the tax owed within 10 days, the fine jumps to 1% per month.
- The penalty tops out at 25% of the unpaid tax, plus interest.
Failure to File
If you don’t file your return on time, there’s a failure to file penalty of 5% for every month or partial month your return is late. For example, if you originally owe $1,000, your failure-to-file penalty would be $50 a month. After five months, the IRS caps the penalty at 25% of the taxes owed, but your balance keeps growing because the IRS charges you interest on the penalty amount. If your return is more than 60 days late, there’s an additional minimum penalty. In 2024 it’s $485 dollars or 100% of what’s owed, whichever is less. Keep in mind, even if you receive an extension to file, payment of taxes is still due in April.
There are some other penalties to watch out for.
Accuracy-related Penalty
The IRS wants you to calculate well and be honest. That’s where the Accuracy-related penalty comes in. Failure in this category will cost you 20% of what the IRS says you should have paid. This can happen in a couple of ways.
- Negligence or disregard of the rules or regulations: This happens when you claim a deduction or credit without actually checking to see if it applies to you or if you fail to maintain accurate records to justify your income, deductions or credits.
- Substantial understatement of income tax: The government requires you to be making tax payments throughout the year — either through quarterly estimates or payroll withholdings. If you don’t pay enough, you could get penalized. The IRS says a substantial understatement of income tax occurs if you “understate your tax liability by 10% of the tax required to be shown on your tax return or $5,000, whichever is greater.”
Erroneous Claim for Refund or Credit Penalty
If you claim a refund or credit for an excessive amount without reasonable cause, the penalty is 20% of the excessive amount claimed, plus interest. Even though it seems like this would fall under the Accuracy-related penalty, the IRS says:
“The penalty shall not apply to any disallowed portion of the claim for refund or credit that is subject to any component of the Accuracy-Related Penalty or the Imposition of Fraud Penalty.”
In English that means you shouldn’t be hit with two penalties for the same mistake.
Dishonored form of Payment Penalty
You may have done all the right stuff—filed on time, paid on time, your math was perfect and you didn’t take any deductions you weren’t entitled to. But if your check bounces or your bank rejects your electronic payment to the IRS—you guessed it, you get penalized.
- If you owe less than $1,250, the penalty is the amount you owe or $25, whichever is less.
- If you owe more than $1,250, the penalty is 2% of the payment amount.
And like all other penalties, it’s “plus interest.”
How much is the interest
Generally, interest is charged on any unpaid tax and penalties from the original due date of the return until the date of payment. The interest rate is the federal short–term interest rate plus 3 percent. Interest is compounded daily. Currently the rate is 8%.
Penalty Relief
If you think the IRS is wrong, you can request penalty abatement using four reasons:
- Proving a statutory exemption such as disaster relief or combat zone relief.
- Documented evidence that you received erroneous advice from the IRS that you relied on. The key here is “documented.”
- Reasonable cause—you must demonstrate that you exercised ordinary business care and prudence but couldn’t comply. You must also demonstrate that your noncompliance was not due to willful neglect.
- Administrative waiver—the most widely available administrative waiver is first-time penalty abatement (FTA). FTA can be used to abate the failure to file, failure to pay, and failure to deposit penalties for one tax period when you have a clean compliance history for the past three years. You can use FTA for penalties on Form 1040, Form 1120, and payroll and pass-through entities.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
