Common Tax Penalties and How to Avoid Them

Litchfield, NH Resident Looks for Advice

One of the most common penalties that taxpayers incur from the IRS is the failure-to-file penalty. If taxes, or an extension, are not filed by the tax deadline and there is money owed a penalty totaling 5% of the taxes owed from the return will accrue each month. This dollar amount is capped at 25% of the owed taxes and there is a minimum penalty for tax money paid within 60-days. Failure-to-pay is another common tax penalty that occurs if taxes are filed but owed money is not paid, or an extension filed, by the tax deadline. This penalty is 0.5% of the money owed, also capping at 25%. Regardless of being a day late or 30 days late, both the failure-to-file and failure-to-pay penalties will be charged for a full month minimum.

A Litchfield resident had been surprised to be hit with IRS penalties in her previous tax filing. Hoping to prevent any surprises during this tax season, she contacted the team at Merrimack Tax Associates for a better understanding of the most common tax penalties and ways that she could avoid them.

Tax Penalty for Failure to Pay Estimated Taxes

Self-employed individuals are required to pay quarterly estimated taxes throughout the calendar year. This money is supposed to be paid as you receive the income, instead of a large lump sum paid at the end of the year to cover all of the taxes. If at the end of the year you owe more than $1,000 in taxes, whether from failing to pay estimated taxes or miscalculating the amount, you may be penalized for underpayment of estimated taxes. There are some exclusions to this penalty, including if you have paid 90% or more of what you owe in taxes for the current year and if you have paid estimated taxes totaling at least 100% of last year’s tax bill (this number goes up to 110% for higher earners).

Writing a Bad Check to Cover Your Tax Bill

If your tax payment to the IRS is returned for insufficient funds you will receive a penalty. The amount is either 2% of the check’s amount or $25, whichever amount is lower.

The Litchfield resident was pleased to hear that with the help of the Merrimack Tax Associates team she would be able to get her taxes filed and paid on time, avoiding the chance of incurring any IRS penalties.