Not enrolled in online banking? Enroll today!
Avoiding Tax Penalties
Mistakes are common when filing and paying your taxes. In such a case, it’s best to know what types of penalties you can incur and how to calculate them to stay better prepared.
What’s a Tax Penalty?
Your income tax returns are filed directly with the Internal Revenue Service (IRS). However, you can face a tax penalty if you have underpaid your quarterly taxes, missed a deadline while filing those taxes, or have had a check used to make tax payments bounce. In addition, you can still get a penalty even if the IRS owes you a tax refund.
The IRS will always send a notice if you incur a tax penalty. Typically, they calculate the tax penalty based on the following equation:
Total Tax – Refundable Credits = Total Tax on Return
Penalties are calculated based on:
Types of Tax Penalties
You can incur a penalty for a variety of reasons.
Failure to file your income tax return:
The IRS does offer an extension for those who fail to file their tax return before the due date. However, you will incur a penalty if you fail to file during the extension period.
The incurred penalty charges 5% of the tax due every month or part thereof, exceeding the time for return filing. Eventually, the amount caps at 25% (5 months) of your balance. However, if you file your return 60 days late, you’ll incur a penalty of $435 or 100% of the tax owed, whichever is less for returns due after 1/1/2023.
To avoid tax penalties, file your tax return before the due date (or the extended period). When you’re expecting a return, you will not incur a penalty. However, when you’re getting a return, file it within three years of the due date or risk losing the refund.
Failure to pay the due taxes:
To avoid penalty, you’ll need to pay all your taxes before your return’s due date. If you have unpaid taxes before the stipulated date, you’ll incur a penalty of 0.5% of the tax payable per month that maxes out at 25% of the tax due.
Although both penalties can occur in the same month, the penalty for failing to file your return decreases by the penalty for failing to pay your taxes. The maximum combined penalty caps out at 5% per month.
If you want to avoid the penalties, pay all your taxes before their due date.
Failure to pay the estimated tax:
Since the IRS follows a “pay-as-you-go” system, typically, you pay your taxes throughout the year as you receive income. You’ll incur a penalty if you owe more than $1,000 in taxes.
To avoid a tax penalty, you need to pay quarterly estimated taxes, typically due on:
Calculating your taxes each year can be challenging. However, the IRS does offer a ‘safe harbor’ method when calculating your estimated payments. You can avoid an underpayment penalty if:
Dishonored Checks:
If the check you sent to the IRS gets returned, they will charge a 2% penalty of the total check amount, maxing out at $1,250. Therefore, the fine is $25 or the total amount of the check, whichever is less.
You can easily avoid tax penalties by ensuring that you pay all of last year’s taxes. Try following the steps below to prevent future tax penalties:
Takeaway
Filing returns and paying your taxes tend to be a tedious process. If you’re looking to avoid penalties altogether, ensure you get all the information together and pay your taxes on time.