Avoiding Tax Penalties

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Did you know there are more than 140 civil penalties in the Internal Revenue Code?  Many of these are designed to be stiff deterents to prevent certain acts or omissions.  Here are a few of the most common penalties:

February 14, 2005
Author: Derek Rowley

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  • FAILURE TO FILE A RETURN. There is a 5% penalty for unpaid taxes per month (or fraction thereof) for failing to file a tax return.  The maximum penalty is 25%, with a minimum penalty of $100 or %100 percent of the required tax shown on the return if the return is not filed with 60 days, including extensions.  The $100 minimum penalty is not imposed if there is no underpayment of tax.
  • FAILURE TO FILE ON TIME. The penalty is .5% of the unpaid tax per month or fraction of a month, up to 25% of the tax.  If at least 90% of the tax is paid by the return’s original due date, the penalty is waived.
  • FAILURE TO PAY ESTIMATED TAX.  The IRS imposes a penalty which is the IRS rate of interest on the underpayments, which is adjusted quarterly.  This penalty is avoided for most individuals if they at least 90% of the liability for the current year, or 100% of the liability for the preceding year.  If your Adjusted Gross Income for the prior year is over $150,000 ($75,000 if filing separately), your safe harbor is 110% of the prior year’s liability.
  • FAILURE TO DEPOSIT TAXES. Employers must deposit employment taxes on time, or suffer the consequences.  If you are not more than 5 days late, the penalty is 2% of the underpayment.  From 5 to 15 days late, the penalty is 5%.  More than 15 days late is a 10% of the liability.  If they have to send you a Notice and Demand for payment, it will cost you 15%.  This is a very expensive way to finance your employment taxes.  If you do it repeatedly, you will have to show up at the IRS offices and explain yourself.
  • FAILURE TO WITHHOLD AND PAY TAXES WITHHELD FROM WAGES. The IRS can collect taxes from the “responsible person” by means of a personal penalty, which is 100% of the emount of employment taxes required to be wittheld from wages.  A “responsible party” may be a corporate officer or other employees in position of authority.  This penalty cannot be discharged in bankruptcy.

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