No one wants to find out that they owe money to the IRS when Tax Day arrives. However, owing money to the IRS is even worse when the amount includes additional penalties that you could have avoided through more prudent tax planning. Below are some of the most common mistakes taxpayers make that can result in a penalty from the IRS.
Failure to File a Timely Tax Return
Tax Day in 2019 is April 15. In order to encourage taxpayers to timely file their returns, the IRS charges a 5% penalty for each month or part of a month that a return is late for up to five months and is based on the amount owed. The IRS charges a minimum late filing penalty for returns filed more than 60 days after the due date, which for 2018 returns is the lesser of (a) 100% of the tax required to be paid on the return, or (b) $210.
Failure to Pay Your Tax Balance on Time
April 15 is also the date that you must pay any tax amounts that you owe. The IRS assesses a 0.5% penalty on this amount for each month that is it late up until you pay in full or until the penalty amount reaches 25%. Like penalties for failure to file, penalties for the full failure to pay penalty applies to any part of a month. When both the late filing and late payment penalties are paid the maximum amount is 47.50% rather than 50%.
Failure to Pay Your Proper Estimated Tax
Individuals who receive income from sources other than an employer (e.g., investment income, self-employment income or income from a pass-through entity) may be required to make quarterly estimated tax payments using IRS Form 1040-ES. Failure to do can result in an estimated tax penalty. The due dates for the estimates are April 15th, June 15th, September 15th and January 15th and the penalty is calculated separately for each installment. The penalty rate for the first quarter of 2019 is 6%.
Mistakes With Your Retirement Accounts
Here are two mistakes individuals make with their retirement accounts that cause can cause an IRS penalty:
- Early Withdrawal from Retirement Accounts: Generally, the IRS imposes a penalty of 10% of any amounts you withdraw from your IRA or 401(k) before you reach the age of 59 1/2, although there are a few exceptions to this rule.
- Failure to Take the `Required Minimum Distribution (RMD) from Retirement Accounts: As a corollary to the above rule, the IRS also imposes a penalty on individuals who fail to make withdrawals from their IRAs or 401(k)s after the age of 70 1/2. Calculating your required minimum distribution can often be complex, but the IRS can assess a hefty 50% penalty on any amount that you should have taken by December 31 of the year in question.
Filing an Incorrect or Fraudulent Tax Return
The IRS expects the tax return you file to be an accurate and complete accounting of your income. If you underpay your taxes because you made a mistake that amounts to a substantial underpayment, or negligence or a disregard of the rules and regulations, (e.g., you claim a tax break that you should not have), the IRS may impose a 20% penalty on the amount underpaid. However, if you intentionally misstate your income with the intent to evade tax, a civil fraud penalty of 75% can be assessed.
Contact a Boca Raton CPA at East Coast Tax Consulting Group
A good way to avoid IRS penalties is to enlist the assistance of a professional tax advisor who can assist you in making smart tax decisions. For more information about IRS penalties and what you can do to avoid or minimize them or have them removed, contact the East Coast Tax Consulting Group, a Boca Raton tax resolution and tax preparation services company. Call us today at 866-550-7655.