How could you end up owing the IRS a penalty? There are more reasons than you might realize.
It’s bad enough that you have to fork over a chunk of your income to the IRS each year. If you make a mistake while doing so, you could get hit by a penalty that might add hundreds, if not thousands, to your bill.
Here’s a look at some of the many ways the IRS can fine you.
When this penalty applies: When you fail to file your tax return by the due date
How much the penalty costs: 5% to 25% of unpaid tax plus interest
The government sets an annual due date for tax returns – April 15, most years – and expects you to adhere to it. If you fail to file a return or request an extension by that date, you could get hit with a failure to file penalty based on how late you file and the amount of unpaid tax.
This penalty is 5% of any unpaid tax for each month or part of a month that your return is late. The penalty continues to grow until it caps out at 25% of the unpaid tax. After five months, the penalty itself won’t get larger, but your balance will continue to grow since interest is assessed on the penalty amount.
If the filing deadline has just passed, you’ll want to get in your return ASAP. Once you are 60 days overdue, the IRS charges a minimum amount. For returns due in 2024, the minimum failure to file penalty is 100% of the underpayment or $485, whichever is less. If that seems confusing, well, guess that’s the IRS for you.
Failure to pay penalty
When this penalty applies: When you fail to pay the tax you owe by the due date
How much the penalty costs: 0.25% to 25% of unpaid tax plus interest
Not only does the IRS expect you to file your return on time, but they also want you to pay any tax owed on time. Go figure.
If you fail to pay your tax bill by the tax filing deadline, you’ll get hit with a failure to pay penalty. Note that even if you receive an extension to file your return later, payment of tax is still due on Tax Day in April.
The failure to pay penalty can be calculated in a several different ways:
- The standard penalty is 0.5% of the unpaid tax for each month or part of a month that payment is late.
- If you filed an individual tax return on time and have an approved payment plan, the penalty is reduced to 0.25% per month.
- If you receive a notice from the IRS about their intent to levy and you fail to pay the tax owed within 10 days, the fine jumps to 1% per month.
In all cases, the penalty tops out at 25% of the unpaid tax.
Also, if you owe penalties for both a failure to file and a failure to pay, the IRS won’t charge more than 5% per month for the two penalties combined. Isn’t that generous of them? Of course, you still will be paying interest on the amount you owe too.
Accuracy-related penalty
When this penalty applies: When you understate your income or claim credits/deductions for which you don’t qualify
How much the penalty costs: 20% of the underpayment of tax caused by the mistake, plus interest
This penalty may be more common among self-employed individuals who pay quarterly taxes, but it could apply to anyone.
An accuracy-related penalty typically happens in one of two ways:
- Negligence or disregard of the rules or regulations: This could happen when you claim a deduction or credit without actually checking to see if it applies to you or if you fail to maintain accurate records to justify your income, deductions or credits.
- Substantial understatement of income tax: The government requires you to be making tax payments throughout the year — either through quarterly payments or payroll withholdings. If you don’t pay enough, you could get penalized. The IRS says a substantial understatement of income tax occurs if you “understate your tax liability by 10% of the tax required to be shown on your tax return or $5,000, whichever is greater.”
Either way, the penalty is 20% of the underpayment plus interest.