April 15 is the deadline for most people to file their individual income tax returns and pay any tax owed, but life happens and deadlines are missed.
If you miss the standard tax deadline, you may face penalties and interest for failing to file.
Now, it’s important to understand the different types of tax penalties and their calculation to avoid a financial headache.
Let’s dive deep into the world of late tax filing penalties and how you can avoid them in the future. Keep reading.
Understanding Late Tax Filing Penalties
In the United States, there are penalties for filing your return late. If you fail to file taxes by the due date, you will be charged penalties by the Internal Revenue Service (IRS). It is the amount you must pay as the percentage of taxes you didn’t pay on time.
Now, let’s understand the different penalties and their calculations:
Failure to file a penalty: This is the most common penalty. This is when you don’t submit the most paperwork on time.
It's a 5% monthly penalty, meaning you get charged 5% extra for each month (or even part of a month) your return is late.
There's a cap of 25% on the total penalty. This means the maximum penalty you can be charged is 25% of your unpaid taxes, regardless of how late you file.
Example:
Imagine you owe $1000 in taxes and didn't file on time.
Penalty per Month: You'll be charged a 5% penalty on the unpaid amount for each month your return is late. (Think of it like an extra late fee!)
Maximum Penalty: This penalty won't go on forever. The most you'll ever pay is 25% of your unpaid taxes. In this case, that's a maximum of $250 (25% of $1000).
Overlapping Penalties:
If you owe both a Failure to File penalty and a Failure to Pay penalty (for not paying your taxes on time), things get a little more complex.
In these cases, the Failure to File penalty gets reduced by the amount of the Failure to Pay penalty for each month they overlap.
Basically, you're not double-charged for being late on both filing and paying.
Maximum Penalty:
If you wait more than 5 months to file, the Failure to File penalty reaches its maximum of 25%. However, the failure to pay the penalty keeps increasing until you pay your taxes, reaching a maximum of 25% of the unpaid amount on the original due date.
The 60-Day Rule:
If you're more than 60 days late in filing, there's an additional twist. In this case, the minimum penalty is either:
The standard 5% monthly penalty calculation (up to a maximum of 25%). OR
100% of the unpaid tax amount (whichever is less).
This basically means that if your unpaid taxes are low, the minimum penalty might be higher than the standard 5% monthly calculation.
How do you know if you owe a penalty?
When the IRS charges you a penalty, they send you a notice or letter by mail. The notice or letter will tell you about the penalty, the reason for the charge, and what to do next. These notices and letters include an identification number.
Verify that the information in your notice or letter is correct. If you can resolve the issue in your notice or letter, a penalty may not apply.
How can I avoid a penalty?
You can avoid a penalty by filing accurate returns, paying your tax by the due date, and furnishing any information returns timely. If you can’t do so, you can apply for an extension of time to file or a payment plan.
How do I dispute a penalty?
If you disagree with the amount you owe, you may dispute the penalty.
Call the IRS at the toll-free number or write a letter stating why they should reconsider the penalty. Sign and send your letter, along with any supporting documents, to the address on your notice.
Have this information when you call or send your letter:
The notice or letter the IRS sent you
The penalty you want to reconsider (for example, a 2021 late filing penalty)
For each penalty, explain why you think the IRS should remove it.
If a notice or letter that the IRS sent you has instructions or deadlines for disputing the penalty, pay careful attention. You must follow the instructions to dispute the penalty.
If you didn’t receive a notice or letter, get telephone assistance.
Wrapping up
Penalties are a way to discourage late payments and ensure accurate reporting of income.
Remember, timely filing, accurate reporting, and proper record-keeping are key to minimizing tax penalties.
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Whether it's retirement, debt management, insurance, taxes, or medical practice, you can book a free seminar with us on either of the topics to up your financial game. Book Now:
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