The IRS has the right to assess many different penalties. The agency uses penalties to deter people from breaking the tax code. Some penalties are relatively insignificant dollar amounts, others are a percentage of the tax due, and still others are very severe. There are also criminal penalties, including massive fines and possible imprisonment.
To help you deal with IRS and state tax penalties, we put together this guide with links to resources with more information. To learn more now or to get help dealing with tax penalties, contact us at Seattle Legal Services, PLLC today.
Penalties for Unpaid Taxes
If you don’t pay your tax bill, the IRS will assess a failure-to-pay penalty. This penalty starts at .5% of your tax bill each month, and it increases to 1% after a period of delinquency. It drops to just .25% if you set up a qualifying payment plan. Interest also accrues on unpaid balances.
Penalties for Unfiled Taxes
The penalty for not filing your tax return is 5% of the balance due every month, making it 10 times higher than the initial failure to pay penalty. Additionally, you will lose your refund if you don’t file your return within three years of the due date. If the IRS believes that you didn’t file in an attempt to commit tax evasion, you can face criminal charges.
Underpayment of Estimated Tax Penalties
Self-employed individuals and C-corps are generally required to pay estimated quarterly tax payments. If you don’t pay on time, the IRS will add a penalty and assess interest from the original due date.
Accuracy-Related Penalties
These penalties generally come into play when the IRS audits your tax return and discovers that you underreported your income significantly. Accuracy penalties can be 20% of the unreported tax liability. You can also incur these penalties for substantial valuation misstatements and for overstatement of pension liabilities.
Tax Fraud Penalties
Most of the above penalties are civil penalties. Tax fraud, in contrast, can lead to civil or criminal penalties. Possible consequences include fines of up to $100,000 ($500,000 for corporations) and jail time of up to five years.
Penalties for Bounced Checks/Returned Payments
If you send the IRS a bad check or if your bank returns your direct debit payment, the IRS will assess a penalty. As of 2024, the Dishonored Check or Other Form of Payment Penalty is 2% of the payment or a minimum of $25. In addition, this issue can also cause the IRS to put payment plans or offer in compromise agreements into default.
Penalties for Early Withdrawal of Retirement Accounts
When you take funds out of a retirement account before you reach age 59.5 years, the IRS will assess an automatic 10% early withdrawal penalty. There are some exceptions such as withdrawing the funds from an inherited IRA, but when assessed normally, this is not a penalty that you can get waived.
Penalties Related to International Transactions or Assets
The IRS has strict reporting requirements for foreign bank accounts and specified foreign assets. If you don’t report foreign bank accounts as required, you will incur an FBAR penalty which is $10,000 for non-willful violations and $100,000 (or 50% of the account balances if higher) for willful violations. In both cases, these are the penalties from the legal code, and as both penalties are indexed to inflation, they are higher now.
You can also incur significant penalties if you don’t report certain foreign assets on your income tax return. Under FACTA rules, if you don’t file Form 8938 as required, the penalty can be up to $25,000 and up to five years imprisonment. If you have foreign assets or bank accounts, make sure you work with a tax preparer who understands these rules.
Criminal Tax Penalties
Criminal tax penalties are also more severe than civil tax penalties. Not only are these penalties higher, but they can also include jail time. Most people are much more likely to face civil penalties than criminal penalties, and if you’re facing criminal charges, you should contact an attorney as soon as possible.
Navigating Penalty Abatement and Relief
Penalties add up quickly, but in some cases, you can get them abated or waived. In particular, the IRS may agree to waive penalties in the following situations:
- Reasonable cause — A death, serious illness, or disaster prevented you from filing or paying on time.
- First-time abatement — You have been compliant with tax laws and have not claimed first-time abatement in the last four years.
- Administrative waiver — The IRS is waiving the penalties due to you being in a federal disaster zone or for a similar reason.
In some cases, the IRS may waive penalties automatically, but in most cases, you must apply for penalty abatement. You may be able to request penalty abatement over the phone, or you can file Form 843. Your tax attorney can also help you request penalty waivers.
Get Help With IRS Penalties
If you’re currently dealing with IRS penalties or interest, get help now before your tax liability gets any higher. At Seattle Legal Services, PLLC, we can help you figure out why you’ve incurred penalties and help you make a plan to get rid of them. To learn more, contact us today.