Tax bills are bad enough as they are, but even worse than them are the penalties levied For more information by the IRS for failure to pay your taxes on time. There are many different ways through which the IRS collects additional money.
Tax penalties may be levied for not filing tax returns, not possessing health insurance, and a number of retirement account inactions or actions as the case may be. However, the main reasons as to why tax penalties are levied on individuals include not paying the amount owed, not paying sufficient tax during the course of the year, or not filing tax returns at all.
Non-Filing Penalty
In case an individual fails to file Form 1040, he / she must ensure to use Form 4868 for an extension before April 15 in order to avoid the accrual of penalties. The charge imposed is usually 5% per month of all tax balances due.
Customers who are late in filing theirIncome Tax Return will have to pay the whole monthly charge regardless of how late they are in a particular month. For instance, if the returns are filed on the 1st of May, the customer will still be charged the 5% monthly penalty for that month.
A good number of taxpayers find themselves in the ostrich routine, particularly those who owe tax and aren’t able to afford payments. Such customers simply ignore filing, which is far from a good idea because they are merely delaying the inevitable.
If an extension is offered until say, the 15th of October, to submit the Form 1040, customers will have to pay up before the deadline in order to avoid the accrual of the non-filing penalty.
Moreover, the IRS views non-filing of returns as a very serious offence – even worse than not paying tax. But the good thing about this penalty is that it cannot be more than 25% of the customer’s unpaid taxes. However, 25% is still a heavy penalty to pay for not filling out a form on time.
Non-Payment Penalty
Unpaid taxes are subject to their own charges. Even if a customer files his / her returns or extension by the 15th of April but fail to pay the money they owe in the same month, a non-payment penalty equal to 0.5% of the due tax will be levied. Similar to a non-filing penalty, a non-payment penalty is also calculated for each month, or parts of the month in which your tax bill remains unpaid. Again, like the non-filing penalty, this penalty can accrue until it hits 25% of the customer’s unpaid tax bill.
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Underpayment Penalty
Underpayment penalties are levied when a customer does not make the whole payment owed on tax. Taxes must be paid as income is earned, and most taxpayers comply with the rule for fear that income tax will be withheld from their paycheques.
However, independent contractors who work side jobs in addition to their salaried employment or as full time workers are responsible for ensuring that the tax due on their earnings are covered through estimated tax payments.
The payment of tax on time is also applicable to other incomes like stock options, investment earnings and prize winnings. Sometimes, individuals who get these different kinds of untaxed incomes pay the money they owe in one lump sum during the time of filing their taxes.
A portion of the earnings through such incomes must be paid to the IRS, and failure to do so will result in the levy of an underpayment penalty regardless of whether or not you eventually pay the whole tax due.
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