10 Common Tax Penalties to Watch Out For

Amounts Due and Penalty for Failure to Pay Estimated Taxes

Payments are made on a pro-rata basis, meaning taxpayers must withhold or make anticipated tax payments throughout the year to meet their tax obligations. Generally, projected tax payments are paid in four equal installments, payable on the following dates: April 15, June 15, September 15, and January 15.

Currently, the penalty for underpayment of anticipated tax is 3 percent of the underpayment if a taxpayer owes more than $1,000 when they file their return for the year. A "safe harbor" payment of 90% of the current year's tax liability or 100% (for high-income taxpayers) of the prior year's tax liability can protect you from this penalty. To avoid a fine, those in the agricultural and fishing industries only need to prepay 66-2/3 percent or 100 percent of their previous year's liabilities.

When the taxpayer's tax is higher than the year before, the safe harbor of 100 percent / 110 percent is useful. On the other hand, estimated tax payments might have a significant influence when a taxpayer predicts a significant decline in earnings from last year. Taxpayers will likely pay 90 percent of the current year's tax due rather than 100 percent or 110 percent of the prior year's tax liability as a safe harbor for estimated tax in the lower-income year. Make an appointment with a YokeTax professional so we can evaluate if and how much you need to pay.

The Penalty for Failure to Meet the RMD

Retirees should take an RMD each year after reaching the mandatory RMD age to prevent an individual from investing in tax-deferred retirement plans, such as traditional Individual retirement accounts, but never withdrawing funds from the plans (which would indicate that the federal government would never collect taxes on the retirement funds). The current age of distribution is 72.

Excess accumulation (under-withdrawal or under-distribution) is punished by a penalty of 50% of the difference between what was withheld and what was withheld. However, in most cases, the Internal Revenue Service is extremely lenient in abating penalties when adopting remedial measures.

• Late-filing tax penalties
• The penalty for failing to pay taxes on time
• penalty for late payment of taxes

A penalty of 4.5 percent each month (up to 22.5 percent) will be levied if a return is filed beyond the due date, including after extensions. Returns are typically due on April 15 of the following year. The initial deadline for 2020 returns was moved to May 17, 2021, due to COVID-19. A further extension until October 15, 2021, was available to anybody who failed to file by that deadline. The IRS strongly recommends filing your 2019 or 2020 tax return as soon as possible to avoid late-filing penalties.

It is the lowest of $435 ($450 in 2022) or 100% of the tax due if a return is filed more than 60 days late, whichever is greater. If you can show that there was reasonable cause and no deliberate disregard, the IRS may be willing to relax the penalty for late filing. The obvious way to avoid the penalty is to file on time.

Tax penalties for late payment

Suppose the tax owed on a return is paid after the unexpended due date of the income tax return (normally April 15 but is May 17 for 2020 returns filed in 2021). In that case, the taxpayer will undergo a penalty of 1/2% each month (maximum 25%) of the unsettled balance.

Taxpayers are regularly caught by this penalty when they require an extension to file their income tax return; plenty fail to recognize that the extension does not include an extension on paying. The only method to prevent or lessen this penalty is to have little or no balance due on the return when it is finally filed. The extension form includes a provision to pay the predicted balance owed when filing the extension.

Negligence penalties for taxes

Taxpayers who fail to pay taxes because of their negligence or inaccuracies in tax evaluations are subject to a 20% penalty. Due to underreporting or overstating deductions, the Internal Revenue Service might impose a penalty on a previously filed tax return.

• Amounts due to taxpayers who commit tax fraud
• Fraud penalties in the tax code
• The penalty for tax fraud is 75% of the unpaid tax.

Penalties for a Returned Unclaimed Funds Check

Two percent of the check amount is the penalty for dishonored checks of more than $1,250. There is a $25 fine if the check amount is less than $1,250, whichever is lower. An installment payment plan can be set up with the Internal Revenue Service if you don't have enough money to pay your taxes when you file for your return. If you're on a payment plan, you may still be hit with late fees, but the penalty rate will be lower.

Tax penalties for Missing ID Number

Anyone who fails to include their or another person's Social Security number on their tax return will be subject to a $50 penalty for each omitted digit. If the taxpayer fails to provide their SSN to another person or organization when requested, they will be penalized.

Penalty for Early Withdrawal

Individual retirement accounts (IRAs) have an early withdrawal penalty of 10% if the account owner is under the age of 59 1/2 and takes money (or other property) out of the plan before that age. It is 10% of the portion of the payout that had to be included in gross income for the year in which it was distributed. This punishment has a wide range of exceptions.

In 2020, this penalty was removed for distributions of up to $100,000 from registered retirement plans and conventional Individual Retirement Accounts. Unless one of the several exceptions applies, early withdrawals in 2021 and later years are subject to a penalty.

Those who fail to submit tips to their employer will be fined. If you don't record your tips, you'll owe the Social Security Administration 50% of the tax. Again, situations like these are why it’s important to connect with a tax pro before tax season. Minimize the chances of these penalties sneaking up on you!

Taxes for failing to disclose foreign accounts and assets can be costly.

Failure to register a wide variety of foreign accounts and properties can result in hefty fines or even excessive penalties. If you have a foreign financial account, a foreign trust, ownership in a foreign firm, or were given foreign gifts, please schedule an appointment with this office.

Excessive Claim Penalty

A penalty of 20% of the overpayment is imposed on the person who files a claim for a refund or credit for unreimbursed federal income tax. When a taxpayer's claim for any given tax year exceeds the maximum amount that may be claimed for that year, it is considered "excessive."

If there is evidence that the excessive amount claimed was justified, there will be no punishment. The penalty does not apply if any component of the excessive amount of credit is penalized for being inaccurate.

Non-Itemizers face an accuracy penalty.

To qualify for the deduction in 2021, taxpayers can donate up to $300 (or $600 for married couples filing joint taxes) in cash to approved charity organizations. Only those who itemize their deductions can deduct charitable contributions. If a non-itemizing taxpayer overstates their charitable gift, they might face a penalty equal to 50% of the tax attributable to the overstatement, rather than the usual 20%.

Penalties for a Refund that is Too Vague

There are additional penalties for filing frivolous returns that do not include information necessary to determine the correct tax, reveal a significantly incorrect tax due to the taxpayer's frivolous position, or display an interest in delaying or hindering the tax laws, such as a $5,000 fine—changing or erasing the preprinted text above the area where the taxpayer signs are included in this. The IRS may be able to decrease the penalty from $5,000 to $500 in some cases.

Tax penalties for Failure to File Information Returns

If a taxpayer fails to file a necessary information return by the due date or in the manner specified by law, fails to include all required information, or contains incorrect information without good reason, they will be subject to a $280 penalty for each return due in 2021 or 2022. To avoid a $150, the infraction must be repaired within 30 days of the deadline or by August 1 for a fine of $50.