Tax penalties are becoming a reliable source of income for the US government. They take in so much money in penalties each year that they include that number in forecasts for future revenue. The IRS knows taxes are complex and individuals will always make mistakes on their taxes and the IRS will always be able to make money off of them. Don’t be one of these people paying the IRS more than you need to. Here are some tips that can prevent or significantly reduce common IRS tax penalties.
- Pay your taxes on time: The due date for paying individual taxes is April 15th, if you do not pay your taxes by then you will be hit with the failure to pay IRS penalty. The failure to pay penalty is .5% a month and starts being charged on April 16th if taxes are not paid or paid in full. If the taxes remain unpaid the IRS may increase this to 1% a month. The maximum cumulative penalty this can be is 25% of taxes owed.
- Enter into installment agreement if you can’t pay in full: The IRS will reduce the failure to pay penalty from .5% to .25% if you enter into an installment agreement to pay back the taxes you owe. The IRS rewards those taxpayers that come forward and work with them on their tax problems, which can be seen by them charging lower penalties. It is common for individuals to not be able to pay taxes in full and the IRS has very good mechanisms in place to help these people get back into full compliance with the IRS.
- File your taxes on time: One of the worst things you can do and rack up huge penalties is not filing your taxes on time. This rule mainly only applies to those individuals that owe taxes. For each month that goes by and you owe taxes and have not filed a tax return, you will be charged 5% for the failure to file IRS tax penalty. This penalty will max out after 5 months and reach a maximum of 25% total penalty. Many people don’t file their taxes because they cannot pay what they owe, this is the worst thing that can be done since the failure to pay penalty is 10 times less than the failure to file penalty.
- File for an extension if you can’t pay on time: If you can’t file on time you can file for a 6 month extension. One thing to know is that when you file for an extension to file, this does not allow you an extension to pay. You still must pay at least 90% of the taxes you owe by April 15th. If you don’t pay the taxes by April 15th and you filed for an extension, you will be charged with the failure to pay penalty. The failure to pay penalty is significantly less than the failure to file, so even if you can’t pay or file on time this will save you quite a bit of money in penalties.
- Remove Penalties: If you have already been charged penalties you can possibly have the removed through penalty abatement. If you can show the IRS that you have “reasonable cause” for not filing or paying your taxes, they will likely remove the penalties. The IRS removes about 30% of the penalties it charges each year.
The best thing you can do in order to reduce or prevent tax penalties is to take action to solve your problem as fast as possible. If you have any questions you should either contact the taxpayer advocate (877-777-4778) or contact a tax professional to help you. Tax penalties are unnecessary and knowing the common causes of these penalties can help you avoid them in the future.