How to Avoid IRS Penalties for Late Filing or Late Payment
Disclaimer: This blog post is not legal advice and is for educational purposes only. This blog post does not create an attorney-client relationship. If you would like to speak to an attorney about a legal matter, please reach out to us today!
As the new year begins, many people are making resolutions to improve their financial health. One of the most important steps you can take is to stay on top of your tax obligations to avoid the dreaded IRS penalties for late filing or late payment. These penalties can quickly add up, adding unnecessary stress to your finances, especially if you’re already juggling other commitments.
Fortunately, there are practical steps you can take to minimize or avoid penalties altogether, ensuring you enter the new year with a clean financial slate.
What Are IRS Penalties for Late Filing and Late Payment?
Failure to File Penalty
What It Is: If you don’t file your tax return by the due date (including extensions), you may face a failure-to-file penalty. This penalty is typically 5% of the unpaid taxes for each month your return is late, up to a maximum of 25%.
How to Avoid It: The easiest way to avoid this penalty is to file your return on time, even if you can’t pay the full amount. You can always request an extension if needed, but remember, an extension only gives you more time to file, not to pay.
Failure to Pay Penalty
What It Is: If you file your tax return on time but fail to pay the taxes you owe, you will face a failure-to-pay penalty. This is generally 0.5% of the unpaid taxes for each month or part of a month the taxes remain unpaid. The penalty can increase to 1% if the IRS issues a Notice of Intent to Levy.
How to Avoid It: The best way to avoid this penalty is to pay your taxes on time. If you can’t afford to pay in full, pay as much as you can to reduce the penalty. The IRS offers options like Installment Agreements or Offers in Compromise to help you pay your taxes over time.
Accuracy-Related Penalty
What It Is: If you make errors on your tax return that result in underpaid taxes, the IRS may impose an accuracy-related penalty, which is typically 20% of the underpaid tax amount.
How to Avoid It: Double-check your tax return to ensure that all information is correct and that you’ve reported all income. Keep accurate records and seek professional help if you’re unsure about any deductions or credits.
Late Payment of Estimated Taxes Penalty
What It Is: If you’re self-employed or have income not subject to withholding, you may need to make estimated tax payments. Failing to make these payments on time could result in a penalty.
How to Avoid It: Make sure to calculate and pay your estimated taxes on time, even if it’s just a partial payment. The IRS offers resources to help self-employed taxpayers estimate their taxes accurately.
How to Avoid IRS Penalties in the New Year
File on Time, Even If You Can’t Pay
The most important step in avoiding IRS penalties is filing your return by the due date. Even if you can’t pay your tax debt in full, filing your return on time avoids the failure-to-file penalty, which is higher than the failure-to-pay penalty.
Request an Extension If Needed
If you need more time to prepare your tax return, request an extension. An extension will give you an extra six months to file your return. However, it doesn’t give you more time to pay. If you owe taxes, make an estimated payment to reduce the failure-to-pay penalty.
Pay What You Can, Even If It’s Not the Full Amount
If you can’t pay your taxes in full by the due date, pay as much as you can. The more you pay, the lower the failure-to-pay penalty will be. If you’re unable to pay in full, contact the IRS to explore payment plan options.
Set Up an Installment Agreement
If you owe taxes and can’t pay them in full, set up an Installment Agreement with the IRS. This allows you to pay off your balance in monthly installments and may help you avoid further penalties and interest.
Double-Check Your Return for Accuracy
To avoid the accuracy-related penalty, review your tax return carefully before submitting it. Ensure that all income is reported, and that you’re not over-claiming deductions or credits. Consider using tax software or working with a professional to ensure accuracy.
Steps to Take If You’ve Missed a Deadline
If you’ve missed a tax deadline, don’t panic. There are still steps you can take to minimize penalties and resolve your situation.
File Your Return as Soon as Possible
Even if you missed the deadline, file your tax return as soon as possible. The longer you wait, the higher the failure-to-file penalty will be.
Pay What You Can
If you can’t pay the full amount owed, pay as much as you can. The IRS will calculate penalties and interest based on the amount that remains unpaid.
Request Penalty Abatement
If you have a valid reason for missing the deadline, such as a medical emergency or other hardship, you may qualify for penalty abatement. The IRS may reduce or remove penalties if you can demonstrate reasonable cause for your late filing or payment.
Example
On New Year’s Eve, Jason, a small business owner in San Antonio, is reflecting on the past year. While he’s excited for the future, he realizes that he forgot to file his taxes for the previous year. With the holiday festivities wrapping up, Jason receives a notice from the IRS warning him about penalties for late filing and payment.Jason doesn’t panic; instead, he takes action. The first thing he does is gather his tax documents and files his return, even though it’s late. He also pays what he can, which is about 50% of the total tax bill. The IRS calculates his penalty for late payment, but it’s far less than it would have been if he hadn’t filed at all.
Jason reaches out to his tax professional, who helps him set up an Installment Agreement with the IRS to pay off the remaining balance. His tax professional also requests penalty abatement for the late filing, and the IRS agrees, given Jason’s otherwise clean tax history. By the end of January, Jason is on a manageable payment plan, with his penalties reduced. He enters the new year knowing that he’s taken the right steps to resolve his tax issue and can move forward with a clean slate.
Don’t let late filing or payment penalties weigh you down in the new year. At Huenefeld Law, PLLC, we help Texans minimize IRS penalties and find manageable solutions to tax debt. Whether you need help filing on time, setting up an Installment Agreement, or requesting penalty abatement, we’re here to guide you through the process. Contact us today to ensure your taxes are in order and that you can enjoy the year ahead without the burden of IRS penalties!
About Huenefeld Law, PLLC
Huenefeld Law, PLLC is a Texas law firm based in Longview, Texas, dedicated to helping individuals and businesses with their legal needs. We specialize in estate planning, business planning, asset protection, elder law, tax litigation, and business formation services.
Whether you prefer in-person consultations or the convenience of online meetings, we tailor our services to fit your busy schedule. Ready to plan for the future or protect your assets? Contact us today to schedule your free consultation and let us help you navigate your legal journey with confidence.
