Common IRS Penalties

Penalties are the IRS's way of shaming taxpayers who fail to follow tax laws and regulations. They can cost you thousands of dollars, but there are ways to minimize your penalties and avoid a costly audit. This article is an overview of the most common IRS Penalties.

Several types of penalties include failure to file and pay, failure to deposit, and dishonored check penalties. In most cases, the IRS will send you a notice or letter explaining how to pay the penalty. Most penalties are abated if the taxpayer demonstrates reasonable cause based on the facts and circumstances in their situation. This can include mistakes triggered by bookkeeping or receiving erroneous advice from a tax professional.

Making partial payments is a good idea if you can’t pay all of your taxes in one lump sum. This can help you show that you’re serious about paying your taxes on time and avoid the failure-to-pay penalty. You can also ask for an extension to pay or get into an IRS payment plan. Getting into a payment plan can reduce the failure-to-pay penalty to 0.5% of your remaining balance each month until you can pay off your taxes. Some of these penalties can be abated or waived if you can prove that there was reasonable cause for your non-compliance. This is why having an experienced tax attorney working on your case is important.

Reasonable-Cause and Good Faith Exceptions to Penalties

The IRS applies a facts-and-circumstances test when assessing whether a taxpayer can avoid penalties for late filing or nonpayment. The IRS uses several factors, including the length of time between when the error occurred and when it was corrected; the reasons for the delay in filing or payment; and whether the taxpayer had other reasons or circumstances for the delay that were reasonable and did not involve willful neglect of his responsibility.

A taxpayer should present a persuasive case that the lateness was reasonable and did not involve willful neglect of responsibility by providing evidence or affidavits supporting the facts. In addition to the facts, a taxpayer should also provide a history of payment and compliance.

Reasonable-Cause and Good Faith Exceptions to Penalties
Common IRS Penalties 1

Dishonored Check and Failure-to-Pay

If you write a check for your tax bill and don’t have enough funds in your bank account to cover it, your check may be “dishonored” or “bounced.” The IRS will then charge you a dishonored check penalty of 2% of the check amount. A dishonored check penalty can be avoided by signing up for overdraft protection at your bank or by checking with the IRS to find out if they will waive the penalty if you can prove a valid reason for your nonpayment.

Another common penalty is the failure-to-pay penalty, which is charged for any tax you owe that is not paid by the end of the month. The penalty is 5% of the amount you owe for each month or part of a month your taxes remain unpaid, up to a maximum of 25%.

Penalty for Not Making Large Enough Quarterly Estimated Payments

Underpayment penalties are imposed on a self-employed taxpayer who does not make large enough quarterly estimated payments or on an employee who does not withhold enough taxes from earnings. The penalty is 2% of the underpaid amount, up to $1,250. For payments less than $1,250, the penalty is $25 or the amount of the check, whichever is lower.

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