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common tax penalties

4 common tax penalties and how you might avoid them

As if tax season weren’t already stressful enough, many taxpayers worry about being penalized by the Internal Revenue Service (IRS). Some scenarios are more complex, but others can be as simple as misplacing a decimal. Unfortunately, one honest mistake can lead to another and before you know it, you have accrued multiple penalties. We have put together a few of the most common penalties and how you might avoid them this year.

Late Filing

Tax Day is commonly on or around April 15th every year for filing your federal tax return as well as paying any taxes that are owed. This year, the official date is April 17, 2018. If you have filed an extension (which extends your due date to October 16, 2018), but paid your tax bill on time, there is no late-filing penalty. But if you don’t file an extension, and still owe taxes, you may be subject to a fine of 5 percent of the unpaid taxes for each month that the tax return is late (the penalty starts accruing the day after the tax filing due date). If your return is filed more than 60 days late, the minimum penalty is $210 or 100 percent of the unpaid tax, whichever value is smaller.

Late Payment

If a taxpayer fails to pay the balance due shown on the tax return by the due date, there is a penalty of 0.5 percent of the amount of unpaid tax per month, up to a maximum of 25 percent. Interest and other additional fees may also apply, so it is important to talk to a tax professional if you might be affected by this penalty.

How to avoid:

If you feel that you are not going to have your taxes done before the official tax day, consider filing an extension early. If you request an extension of time to file your return and pay at least 90 percent of the taxes you owe with your request, you may not face a late payment penalty. However, you must pay any remaining balance by the extended due date.

Generally, it is better to file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return.

Accuracy Penalty

There are two common reasons for an accuracy penalty to happen: substantial understatement and negligence. What does that mean exactly?

  • Substantial Understatement is when you substantially under-report your income by more than $5,000 or 10 percent.
  • Negligence is when you disregard or do not conform to IRS rules and regulations.

The penalty for inaccurate information can be 20-40 percent on the total tax underpayment, depending on the situation.

How to avoid:

It might be a good idea to hire a tax professional to prepare your tax documents in order to avoid inaccuracy. This may also help you avoid being negligent since the tax professional will likely be up-to-date on the IRS rules and regulations. If you have tax questions regarding accuracy, you can ask a tax lawyer.


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Bounced Check

A dishonored or bounced check to the IRS is likely not the end of the world, however, it is something that you may want to take care of right away. If your check is declined for insufficient funds, the clearinghouse may run it a second time. If it is run a second time and there is no issue, you generally will not receive a penalty fee. If your check is not re-submitted, a new one must be sent, and you will likely get a penalty fee. If the check is less than $1,250, the penalty is either the amount of the check or $25, whatever is the smaller amount, and for checks of $1,250 or more, the penalty is two percent of the check amount. Not only can you acquire a fee for a bounced check, but you may also owe late fees for not paying your taxes on time. Just because you submitted the dishonored check before the due date does not mean that payment was received on time.

How to avoid:

One way to avoid a dishonored check penalty is making sure the funds are in your account. Sending a check to the IRS can take weeks for it to be processed. Make sure that you are keeping tabs on your account and when balancing the checkbook, make sure that you are not spending the money that you have sent to the IRS until you have seen that the check has been cleared.

Penalty Relief

The IRS may provide relief if you made an effort to comply with the requirements of the law, but were unable to meet the obligations, due to circumstances beyond your control. The most common penalties that are eligible for relief are late filing and late payment, but other penalties may be eligible per the IRS. There are three types of relief:

  • Reasonable Cause – based on the facts and circumstances of the situation
  • Administrative Waiver and First Time Penalty Abatement – an administrative waiver that the IRS may grant to taxpayers from failure-to-file or failure-to-pay
  • Statutory Exception – for when you received incorrect written advice from the IRS

If you still have questions regarding tax penalties and what you should do, Rocket Lawyer is here to help. Ask a lawyer from our network and get an answer quickly.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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