The IRS May Charge a Penalty If You Fall Into One Of These Seven Categories
We’re slowly moving away from snail mail. Still, if the IRS levies a tax penalty against you, the agency informs you by mail. The letter will tell you what the penalty is for, and what to do next.
According to the IRS, every letter includes an identification number. If you receive a penalty letter, check the ID number first. If it’s not associated with you, or if any other information in the letter is incorrect, don’t sweat it. You may have to jump through a hoop or two, but you can clear it up with the IRS, and the penalty may not apply.
If they have you dead to rights and the penalty is legitimate, you need to pay immediately or set up a payment plan with the IRS.
The best way to avoid IRS penalties is to know what gets penalized. Here are seven issues that may lead to tax penalties.
Individual Taxpayers
1. Failure To File
We’re all supposed to file a tax return each year. It may take a while, but once the IRS figures out that someone has not filed as required, it attaches a penalty.
2. Failure To Pay
Let’s say you file a tax return, only to learn you owe taxes. Failure to pay those taxes leads to a penalty. Your best move is to work with the IRS by requesting a payment plan you can afford.
3. Inaccurate Return
It may be tempting to “get creative” by omitting income or claiming deductions or credits you don’t qualify for. Again, it may take time, but the IRS is likely to catch any fibs. According to the tax collection agency, it can generally audit any return filed within the last three years. If that brings to light more substantial issues, the audit can go back even further. The best financial move is to be honest as you fill out your tax forms. Make a payment plan with the IRS to get caught up if you owe money.
4. Dishonored Payment
You may get dinged with a penalty if you pay taxes with a check or debit card that your bank dishonors due to lack of funds. Double-check that there’s enough money in your checking account to cover your tax payment.
Business Owners
5. Failure To Deposit
Let’s say you own a small business and have a handful of employees. It’s called “failure to deposit” if you don’t pay employment taxes accurately or on time. Failure to deposit is likely to lead to a penalty.
6. Underpayment Of Estimated Taxes
Business owners can also be hit by a penalty for failing to pay estimated taxes accurately or on time. The same is true for individuals who typically pay estimated taxes. For example, if you’re a gig worker who normally pays estimated taxes, the IRS may notice if you discontinue the practice, but end up owing taxes once your return has been filed.
Trusting The Wrong Person
7. Tax Preparer Misconduct
You can owe more in taxes than you thought you did simply because you trusted the wrong person to prepare your return. You may not end up paying for their sins, but if you leave your taxes to a preparer who tends to get overly creative, their behavior is considered misconduct by the IRS, and they’ll be hit with a penalty. Worse for you, your tax return will be gone over with a fine-tooth comb to look for mistakes.
The truth is, the IRS is not the enemy. In fact, the tax collection agency is happy to work with you if you’re willing to work with it. If you receive a penalty letter, it will include an IRS phone number. Give that number a call to learn more about your options.
Source: Motley Fool
