In 2021, the U.S. government collected more than $4 trillion in revenue from individual, corporate, and social insurance taxes. So if you filed (and paid) your taxes, congratulations, you contributed to the government’s revenue!
However, if you didn’t pay your 2021 taxes, you’ll likely have some tax penalties to pay on top of what you already owe. But many of these fines are easy to avoid.
Just keep reading to learn about the three most common types of tax penalties, so you never have to face them.
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1. Failure to File
Tax Day is usually April 15th (when the date falls Monday thru Thursday), so you want to plan to file your taxes by this date yearly. If you know you won’t be able to file by this date, you should file for an extension. The extension gives you until October to file and pay.
If you don’t file or request an extension by Tax Day, the IRS will charge a failure to file a penalty. The fine is 5% of your unpaid tax bill for each month your return is late but has a cap of 25% or five months of your total bill.
If you file your return more than 60 days late, there will be a minimum penalty. The minimum penalty is the lesser amount between $435 and 100% of your tax bill.
If you cannot pay your tax bill, you should still file on time to avoid this penalty. For those that expect a refund, not filing could mean you eventually lose your reimbursement.
2. Failure to Pay
Even if you file your tax return on time, you can still receive tax penalties after filing if you don’t actually pay your tax bill. The deadline for payment is also Tax Day.
Not paying your tax bill results in a 0.5% penalty on the tax you owe per month. It also caps at 25% of your tax due.
If you fail to file and pay, the IRS will decrease the failure to file a penalty by the amount of the failure to pay a fine. This way, your maximum liability for your IRS tax penalties is not more than 5% per month.
If you cannot afford your tax bill, pay as much as you can by Tax Day and continue to pay it off as fast as possible. If you can’t pay it off within a few months, requesting an installment agreement from the IRS is best.
3. Underpayment
Per the IRS, you’re supposed to pay taxes throughout the year instead of a lump sum payment on Tax Day.
If you’re a W-2 employee, your employer can withhold taxes for you. Yet, if you’re self-employed, you must make quarterly payments to the IRS based on your estimated income.
If you owe more than $1,000 on Tax Day, you could face a penalty. However, if you receive an IRS penalty for underpaying your tax bill, don’t rush to pay it immediately.
First, contact a tax professional and learn more about IRS penalty interest abatement. Not all IRS penalties are set in stone, and it’s possible to reduce or eliminate the fine. A tax professional will help you navigate the process of understanding and, if applicable, paying your penalty.
Don’t Let These Tax Penalties Happen to You
You can avoid these three most common tax penalties by filing and paying your taxes promptly each year. If you already have difficulty paying your tax bill, you don’t want to be responsible for additional fines.
Did you find this article helpful? Then, head over to the Finance section for more useful information.
