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Tax Penalties

August 01 2023 •
Tax Penalties & Interest

With over 150 kinds of civil IRS tax penalties, it can be stressful to figure out what you owe when you get a penalty notice. It’s critical to understand the severity of each penalty so you can strategize the best plan for repaying it. Take a look at the most common penalties for individuals and how a federal tax penalty could affect your financial future.

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Tax Penalty for Failure to Pay or Underpayment

Even if you file your tax return on time, you still need to pay the full amount of taxes owed. If you only pay a portion of the taxes or none at all, you could be slapped with an IRS penalty. Typically, underpayment receives a penalty of 0.5% of the unpaid amount per each month you fail to pay. The percentage will increase each month but cannot exceed 25% of the unpaid taxes you owe. However, the monthly percentage decreases to 0.25% if you have an approved installment agreement. Find out more about installment agreements by skipping to the section titled How Do I Get Rid of a Tax Penalty?

Tax Penalty for Failing to File

You typically have until April 15th to file your tax return. If you miss the deadline – for whatever reason –you could pay a 5% IRS tax penalty on the money you owe. The failure to file penalty is capped at 25%, but you could face even more fines if you continue to withhold payment. The minimum penalty for a filer who is 60 days late is the smaller number of either $100 or 100% of the taxes owed.

Tax Penalty for Failing to File

Tax Penalty for Committing Tax Fraud

It is illegal to inaccurately fill out a tax return and report false information. If inaccuracies are found, you may receive an IRS notice CP2000. Tax fraud is the most severe IRS penalty and can incur a penalty of 75% of the owed taxes. In addition to this civil penalty, tax fraud is often tried on a criminal level. If you’re found guilty, you can have property seized to pay off what you owe, be hit with even higher fines, and be sentenced to jail time. If you are being investigated for tax fraud or evasion, the IRS will send you a notice by mail to explain the inconsistent information they have found on your returns.

Tax Penalty for an Incorrect Tax Return

If you file a tax return that significantly misrepresents your financial situation you could face a 20% federal tax penalty on the amount you owe. Slight errors, such as accidentally filling out a form for the wrong year or misspelling your address, will not be punished with a penalty. A tax penalty is typically issued for an incorrect tax return during an IRS audit when a tax payer significantly understates their income or disregards other IRS regulations.

Tax Penalty for Frivolous Tax Submissions

It’s safe to say that no one enjoys paying taxes, but protesting the IRS by knowingly filing an incorrect tax return can come with a heavy price. This type of penalty, known as a frivolous tax return penalty, is given to individuals who do not provide enough information or purposely skew information so an accurate tax return cannot be recorded. A $5,000 fine awaits people who file a frivolous tax submission.

Tax Penalty for Not Paying Estimated Taxes

Apart from paying taxes on your income through paycheck withholdings, you can also use a quarterly estimated tax to pay the money you owe. This method applies to income revenues that aren’t subject to withholding tax such as self-employment, rent, business earnings, and interest. Estimated taxes are paid on a quarterly basis, and can be subject to an IRS penalty for not paying estimated taxes on time. You can usually avoid a fine if you owe less than $1,000 or if you paid at least 90% of the tax for the current year. But if that isn’t the case, you would be fined approximately 4% of the underpayment for the period in which you owed money.

Can You Go to Jail for Not Paying a Tax Penalty?

Most of the tax penalties mentioned above are misdemeanors and will not require any jail time. It is possible to face 1 year of jail time for each year you fail to file or knowingly withhold payments, but it’s highly unlikely. However, tax evasion, tax fraud, and failing to disclose offshore bank accounts can result in significant jail time. These criminal charges can land you behind bars for three to five years, in addition to fines upwards of $100,000.

Can You Go to Jail for Not Paying a Tax Penalty

How Do I Get Rid of a Tax Penalty?

While there’s no way to avoid a tax penalty other than paying your taxes on time, the penalty will stop accruing interest the moment you pay off your full balance. One common way to help reduce IRS penalties and pay off your debt is setting up an individual installment plan. Your unique situation will determine what kind of payment plan you’re eligible for, so it’s important to apply online with the IRS before receiving a penalty if you think you won’t be able to pay off what you owe.

It is also possible to get penalties and interests waived through an IRS penalty abatement if your ability to pay is affected by factors outside of your control. This could include: death of a spouse, natural disaster that forces a relocation, recent retirement, receiving incorrect tax advice in writing, being 62 years or older, or living at or below the poverty line for your specific family size. You can apply for this waiver by calling the toll-free number on your penalty notice.

Additionally, you can file for a First-Time Abatement penalty waiver that allows you to void certain penalties in a single tax period. To qualify you have to prove a three year clean-filing period and demonstrate proper filing for the current tax season. It’s recommended to work with a tax professional to increase your chances of having a successful waiver request.

How to Use a Tax Penalty Calculator

If you are still unsure how much you owe in tax penalties and interest, use an online tax penalty calculator. All you need to do it answer a few simple questions about the taxes you owe, and you’ll be able to get a much clearer picture on how much a tax penalty will cost you.