Dealing with the IRS can be tricky, even for experienced business owners. The IRS imposes penalties for various reasons, including failure to file a return, late payment, and underpayment. In some cases, the IRS will also charge interest on unpaid taxes. But when you face penalties and interest, it can seem impossible to resolve.
If you wish to know more, here is an overview of some of the most common tax problems like IRS penalties and interests.
What Are the Types of IRS Penalties?
The IRS assessed $37.3 billion in civil penalties in FY 2021. There are many types of IRS penalties imposed on taxpayers. Some of them are explained below.
- Late Filing Penalty
It is a failure-to-file penalty. Usually, five percent of the unpaid taxes for each month (or partial month) is the penalty when a return is late, up to 25 percent.
If you file a return more than 60 days after the due date or extended date, the penalty is less than $135 or 100 percent of the unpaid tax. However, you will not have to pay a late filing penalty if you can tell that you forgot to file on time because of an issue and not because of willful neglect.
The failure-to-pay penalty is generally 0.50 percent of your unpaid taxes for each month (or partial month) after the due date that the tax remains unpaid. This penalty applies even if you filed your return on time.
Tax relief services can help you negotiate with the IRS and set up a payment plan to pay your taxes without incurring penalties.
- Accuracy Related Penalty
If you underpay your taxes due to negligence or disregard of the rules, you may be subject to a penalty. The IRS can ask for a penalty of 20% of the unpaid tax.
You may be subject to a penalty if you file your return late or pay your taxes late. The penalty is usually five percent of the unpaid tax for each month or a part of the tax that remains unpaid, up to 25%. But if you can showcase a valid reason, you may avoid the late filing penalty. For example, tax help resources give the best causes like a death in the family, serious illness, or a natural disaster.
If you do not pay the taxes you owe, you should file your return on time and settle as much as possible to reduce penalties and interest. A tax professional can help you set up a payment plan with the IRS.
You may be subject to a failure-to-file penalty if you do not file a return.
- Information Returns
The penalties for not filing information returns can be pretty costly. The IRS imposes a penalty of $50 per return that is not filed timely, with a maximum penalty of $536,000 per year ($186,000 for small businesses and charities). For example, suppose you may not have provided the payee’s correct name or Social Security Number. If the IRS catches this, they will impose a $100 per return, with a maximum penalty of $536,000 per year ($186,000 for small businesses and charities).
Whether you owe the IRS money or they owe you, it is essential to understand the ins and outs of penalties and interest. Fortunately, there are many resources available to help you know it.