As tax season gets underway, we want to remind taxpayers of ways to avoid penalties and interest associated with their income tax filings for 2024. Taxpayer penalties are imposed by the IRS and state taxing authorities to encourage compliance with tax laws and regulations. Penalties can range from relatively minor fines to severe consequences. There are over a dozen types of penalties, but the most common are highlighted below:
Failure to File Penalty (Late Filing Penalty):
Imposed when a taxpayer fails to file a tax return by the due date, including extensions. The penalty rate is typically 5% of the unpaid tax for each month (or part of a month) that the return is late, up to a maximum of 25% of the unpaid tax. If both the failure-to-file penalty and the failure-to-pay penalty apply, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty. There is no penalty assessed if the late return shows no tax due.
Failure-to-Pay Penalty (Late Payment Penalty):
Charged when a taxpayer doesn’t pay the taxes owed by the due date, even if the tax return was filed on time. The penalty rate is 0.5% of the unpaid tax for each month (or part of a month) after the due date. The rate increases to 1% if the taxes are still unpaid after 10 days of receiving a notice of intent to levy. The penalty can continue to accrue until the debt is paid off or until it reaches a maximum of 25% of the unpaid tax.
Underpayment Penalty:
Charged when a taxpayer fails to pay enough of their tax liability during the year, through either withholding or estimated tax payments. This is common among self-employed individuals or those with significant unearned income (e.g., investment income). The penalty is based on the amount of the underpayment and interest rates, which are adjusted quarterly.
TSA recommendations to avoid penalties:
- File and pay taxes on time
- Accurately report income and deductions
- Make estimated tax payments, if applicable
- Keep good records to support income and deductions
- Respond promptly to IRS and state tax notices
Please reach out to your TSA tax professional if you are unsure about tax obligations or the potential for penalties. We can also explain options available for taxpayers unable to pay the tax due, including the IRS’s First-Time Abate policy. Some penalties may be waived or reduced if the taxpayer can demonstrate reasonable cause.
For more information, contact Lisa Mrkall, CPA/PFS, MBA, Partner, Tronconi Segarra & Associates, at lmrkall@tsacpa.com or 716.633.1373.
