There are numerous ways to attract the unwarranted attention from the IRS – almost too many to count. Underpayment of taxes is one of the surest ways to garner their scrutiny, however, and is best to be avoided, whenever possible.
In the case that you don’t pay your federal taxes, in entirety, the IRS will begin tacking on penalties, late fees, and interests. Penalties range in severity, depending on their reasons, and can even sometimes result in criminal charges. If you continue to not pay, the IRS can even place a lien on your assets and property, including your bank account and home.
Some common types of penalties that can incur from underpayment of taxes:
- Failure To Pay: If you don’t pay the entirety of the balance due on your tax return, the IRS will begin to tack on .5% interest for the overdue amount, per month or for part of month overdue. This can continue up to 25% of the total overdue amount.
- Failure To File: In the case that you don’t file a tax return at all – thus underpaying 100% – the IRS will attach a penalty of 5% of the total overdue amount, per month not filed, up to 25% of the total overdue amount. In the case that your return is over 60 days late, the IRS will automatically issue a $135 fine, or 100% of the overdue amount, but not at the same time as the failure to pay penalty, which will be subtracted from the failure to file penalty.
- Inaccuracy: If you underestimate your taxes by 10% or $5,000, due to a mistake, the IRS may attach a penalty of 20% of the total overdue amount, if they have reason to believe the error was legitimate.
- Fraudulent Return: If the IRS believes you have committed fraud on your tax return, grossly under-reporting your total income, they can fine you up to 15% of the overdue amount, per month, up to 75%.
- Frivolous Return: The IRS can fine you up to $500, if you file a claim without sufficient information to process or containing erroneous information. It only applies when it is obvious that you intended to interfere with the tax process.
In addition to these penalties, the IRS will add interest to the overdue amounts, which will be redetermined every quarter.
The IRS will usually not penalize someone for paying under the estimated tax amount, as is common with the self-employed, as long as you’re caught up by April 15th.
Waived Penalties For Underpayment Of Taxes
Although uncommon, there certain special circumstances where penalties and fees can be waived, such as:
- You retired after the age of 62
- You had, and can prove, reasonable cause for underpayment (and, no, lack of finances is not considered a valid reason)
- You did not willfully underpay
If you qualify for the above conditions, you’ll need to file a Form 2210 with the IRS to request a waiver. You will also need to produce a full written explanation of why you failed to pay the anticipated estimated tax.
How To Avoid Underpaying Estimated Taxes
- If you make less than $150,000, make sure your estimated tax is at least as much as the previous year’s
- If you make more than $150,000, is at least 110% of what it was the year before
- If you aren’t able to calculate estimated tax, pay at least 90% of the total tax owed, which can be tricky if you don’t know what the estimated tax is. You can use the IRS Form 1040-ES to calculate your estimated tax.
Have more questions about underpayment of taxes? Contact us today, and let us help!