US Tax Penalty: Avoid Penalties & Save Money

Welcome to our guide on navigating the US tax penalty! Whether you’re a seasoned taxpayer or new to the game, understanding both state and federal/IRS rules is crucial to avoiding costly mistakes. This guide will dive into the common penalties the authorities impose for non-compliance, from late filing to late payments.

Now, let us ask you a question: Have you ever wondered what happens if you miss the US tax deadlines or what the true cost of not paying your taxes on time is? Stay with us as we break down these penalties in plain language, offer tips to avoid them, and explore options if you face these charges.

Let’s get started and make tax season a little less daunting!

US Tax Penalty Types

Based on our comprehensive research, we can divide the US tax penalty into two types:

1. State Tax Penalty.
2. Federal/IRS Tax Penalty.

State Tax Penalty

US state tax systems vary widely, with each state setting its own rules and penalties for tax non-compliance. Whether you’re a resident or a non-resident, understanding these penalties is crucial to avoiding unexpected costs.

Here’s a short overview of the US tax penalty for a state (we used NY State as a model for our discussion):

Interest on the US Tax Penalty for State

Interest will be applied to any tax (including sales and use tax) not paid by your return’s due date, even with an extension to file.

• Interest acts as a fee for borrowing money and generally cannot be removed.
  
  
• The interest, which is calculated daily, adjusts its rate every three months.

Penalty for Late Filing

A late filing penalty will be applied to your state tax unless you’ve been granted an extension to file.

The penalty is calculated as follows:

• A monthly charge of 5% on the owed taxes for each month (or part of a month) the filing is delayed, capped at 25%.
  
  
• For returns filed over 60 days late, the minimum penalty will be either $100 or the total tax owed, whichever is less.

Penalty for Late Payment

Failing to pay your tax by the due date results in a penalty on top of interest charges. However, this penalty can be waived if there’s a valid reason for the delay in payment.

Here’s how the penalty is calculated:

• 0.5% of the unpaid amount for every month (or part of a month) remains unpaid, with a maximum cap of 25%.

US Tax Penalty for Incorrect Calculation of State Tax

If the tax amount you declare on your return is lower than the actual tax by over 10% or $2,000, whichever amount is higher, you could face a penalty.

The penalty is calculated as follows:

• 10% of the discrepancy between the tax amount you declared and the actual tax due.

Penalty for Negligence, Fraudulent Returns, and Frivolous Returns

Negligence Penalty

If your tax return shows less tax than you should have paid because of negligence, without intending to deceive, you will face:

• A penalty equals 5% of the difference between the accurate tax amount and the tax reported on your return.
  
  
• 50% of the interest on any amount underpaid due to negligence.

Fraudulent Returns

If a portion of your tax shortfall is because of fraud, the penalty applied will be:

• Double the amount of the difference between the accurate tax owed and the tax amount declared on your return.

Frivolous Returns

Filing a frivolous tax return can result in a penalty of up to $5,000, on top of other penalties. A return may be considered frivolous if it:

• Lacks the necessary details to assess the accuracy of the tax return.
  
  
• Includes information that is clearly and significantly wrong.
  
  
• Aims to obstruct or hinder the enforcement of Article 22 of the Tax Law or the handling of the return.

Penalty for Underpaying Your Estimated Tax

You might face a penalty for not paying enough estimated tax throughout the year, either through direct payments or withholding. This penalty equals the federal short-term interest rate plus an additional 5.5% (this rate changes every quarter) but won’t be lower than 7.5%.

The penalty for underpayment kicks in for your 2023 taxes if what you’ve paid through withholding and estimated taxes is not at least the smaller of:

• 90% of the tax mentioned on your 2023 tax return.
  
  
• 100% of the tax from your 2022 return, or 110% of that amount if you’re not a farmer or fisherman, and your New York adjusted gross income (NYAGI) or net self-employment earnings allocated to the MCTD were over $150,000 ($75,000 for those married but filing separately) in 2022. Your 2022 return must have covered a full 12 months.

If you’ve underpaid or paid late, you need to work out your penalty using Form IT-2105.9, Underpayment of Estimated Tax by Individuals and Fiduciaries, and attach it to your return.

Note: State tax laws and penalties can vary significantly, so it’s important to check the specific rules and regulations of your required state or consult with a tax professional for personalized advice.

Well, that’s all about the US tax penalty for state (New York) taxes. Now, let’s dive into the next and more important one: the federal/IRS tax penalty.

What Is the IRS Tax Penalty?

The IRS tax penalty is a fine that the IRS charges if you don’t file your taxes or pay the tax you owe by the deadline. Taxpayers who don’t comply with their tax obligations owe a penalty to regulatory bodies such as the IRS.

The IRS can charge you a fine for several reasons, like if you don’t:

• Turn in your tax paperwork by the due date.
  
  
• Pay what you owe in taxes on time and correctly.
  
  
• Make sure your tax return is right.
  
  
• Send in the other required tax forms on time and without errors.

If you don’t pay the fine completely, the IRS can also charge you interest. They’ll keep charging you every month until you’ve paid off the whole amount.

It’s good to know about the different kinds of penalties, what steps to take if you receive one, and how to avoid getting a penalty in the first place.

Different IRS Penalties for Tax Mistakes

In the US, there are several types of IRS tax penalties you, as a taxpayer, might encounter if you don’t comply with tax rules. The types are as follows:

Information Return

The taxpayer might get a penalty if they don’t submit information forms/returns or provide payee statements to the IRS on time or correctly. This type of penalty is known as an information return penalty.

If the taxpayer does owe a penalty, the IRS will send them a letter and will add interest every month until the taxpayer pays off the full amount.

Failure to File

If the taxpayer files their tax return after the due date or doesn’t file at all, they’ll face this penalty. It’s usually a percentage of the unpaid taxes for each month or part of a month the taxpayer’s return is late.

Simply put, this is an IRS penalty for the late filing of tax returns.

Failure to Pay

If the taxpayer doesn’t pay the taxes they owe by the due date, they’ll incur a failure-to-pay penalty. It’s calculated based on the amount of tax not paid on time.

Accuracy-Related

The taxpayer will get a penalty for not being accurate if they pay less tax than they should on their tax return. This can happen if the taxpayer doesn’t tell the IRS about all the money they made or if they take deductions or credits that they are not really supposed to.

The IRS has two main penalties they often give to people for not being accurate enough:

Negligence or Disregard of the Rules or Regulations

Negligence happens if the taxpayer doesn’t make a reasonable effort to follow the tax laws while filling out their tax return. Disregard is when they don’t pay proper attention or deliberately decide not to follow the tax rules or regulations.

Substantial Understatement of Income Tax

For individuals, a taxpayer faces a significant penalty if they report their taxes and miss by either 10% of the tax they should have shown on their return or $5,000, whichever amount is higher.

If the taxpayer takes a Section 199A Qualified Business Income Deduction on their taxes, they’ll get penalized if the amount they report is short by either 5% of the tax they should have paid or $5,000, again, depending on which is higher.

Erroneous Claim for Refund or Credit Penalty

If the taxpayer asks for a tax refund or credit that’s too high and they don’t have a good reason for it, they might get hit with the Erroneous Claim for Refund or Credit penalty. This rule, found in Section 6676 of the tax code, started on May 25, 2007, because of a law called the Small Business and Work Opportunity Act of 2007.

Failure to Deposit

The Failure to Deposit Penalty is for employers who don’t do the following with employment taxes:

• Pay them when they’re due.
  
  
• Pay the correct amount.
  
  
• Pay them the proper way.

Employers must pay federal income tax and contributions to Social Security, Medicare, and the Federal Unemployment Tax. Employers have to send these tax payments to the IRS either twice a week or once a month.

The penalty will be a percentage of the taxes the employer didn’t pay on time, didn’t pay enough of, or didn’t pay the right way.

Tax Preparer Penalties

Lawyers, CPAs or Certified Public Accountants, enrolled agents, or any tax preparers could be penalized if they don’t comply with tax laws and regulations.

If the tax preparer incurs a penalty, the IRS will notify them by mail, and interest will accumulate each month until the full amount due is paid.

Dishonored Checks

The Dishonored Check or Other Form of Payment Penalty is charged when there isn’t enough money in the taxpayer’s bank account to cover the tax payment they made. If the taxpayer’s bank rejects and sends back their check or electronic payment due to insufficient funds, leaving the tax unpaid, this penalty comes into play.

Underpayment of Estimated Tax by Corporations

If a corporation doesn’t pay enough estimated tax or pays it late, the IRS can charge a penalty. The penalty is based on the tax amount shown on your original or most recent tax return, subtracting any credits that give you a refund.

The penalty amount depends on how much the company underpaid, how long it was underpaid, and the IRS’s current interest rate for underpayments, which they update every three months.

This penalty can still apply, even if the corporation is due a refund.

Underpayment of Estimated Tax by Individuals

The Underpayment of Estimated Tax by Individuals Penalty affects individuals, estates, and trusts that either don’t pay enough in estimated tax on their income or pay it after the due date. The taxpayer might have to pay this penalty even if they’re due to receive a refund from the IRS.

International Information Reporting

The taxpayer might get an International Information Reporting Penalty if they don’t comply with the tax laws related to financial activities from outside the country.

If the taxpayer owes this penalty, the IRS will send them a letter, and interest will be added each month until the full amount is paid.

How to Figure IRS Tax Penalty

To figure out an IRS tax penalty, you basically look at what tax you didn’t pay on time, then apply a specific percentage rate the IRS sets for that mistake.

E.g. For late filing, it’s usually 5% per month on unpaid taxes. For late payment, it’s about 0.5% per month of the taxes you owe. The exact amount depends on how late you are and how much you owe.

And the IRS will send you a notice if you owe any kind of penalty.

How Much Is the Information Return Penalty?

If you don’t file information returns correctly and on time, or if you don’t give out payee statements as required, the IRS will charge penalties for each mistake.

To learn more, please visit the IRS website.

How Much Is the IRS Late Filing Penalty?

If you file your taxes late—which is called failure to file—the IRS will usually:

• Charge you a penalty that’s a percentage of the taxes you owe, starting at 5% per month.
  
  
• Increase this penalty for each month or part of a month your return is late, up to 25%.
  
  
• Add interest on the unpaid taxes and penalties, which makes the amount you owe grow over time.
  
  
• If you file your taxes more than 60 days late, there’s a smaller penalty that kicks in. It’s either $485 (for taxes due in 2024) or the total amount of tax you owe, whichever is less.

How Much Is the IRS Late Payment Penalty?

Take a look below to learn briefly about the US tax penalty consequences for failure to pay:

• If you don’t pay the taxes you owe by the deadline, you’ll be charged a 0.5% penalty on what’s owed each month or part of a month until it’s paid, up to a total of 25%.
  
  
• You can avoid this penalty if you can explain why you didn’t pay on time, and that’s a good reason.
  
  
• If the IRS warns they’re about to seize your property and you still don’t pay, the penalty goes up to 1% per month.
  
  
• If you’ve set up a payment plan with the IRS, the penalty drops to 0.25% for each month you’re paying off your taxes through the plan.

How Much Is the Accuracy-Related Penalty?

If you are guilty of negligence or disregard of the rules or regulations, you’ll face an accuracy-related penalty of 20% on the part of your tax that was underpaid due to these mistakes.

If it’s the case of substantial understatement, there’s also a 20% accuracy-related penalty on the amount you underreported on the return.

How Much Is the Erroneous Claim for Refund or Credit Penalty?

An erroneous claim for refund or credit can make you face a 20% penalty on the excessive amount you claimed.

• The “excessive amount” means the part of your refund or credit request that’s more than what you’re actually allowed for that tax year.
  
  
• If your refund hasn’t been paid out because your tax return is under review, you might still get hit with a penalty for not being accurate, unless you have a good reason for the mistake.
  
  
• This penalty won’t apply to any part of your refund or credit request that gets turned down if it’s already being looked at for a penalty related to accuracy or fraud.

How Much Is the Failure to Deposit Penalty?

The Failure to Deposit Penalty is figured out by how many days late your deposit is, counting from when it was due.

The penalties don’t stack up. For instance: if you’re over 15 days late with your deposit, the IRS won’t add a 10% penalty on top of the previous 2% and 5% penalties. In this case, you’d just have a total penalty of 10%.

How Much Is the Tax Preparer Penalties?

Tax preparer penalties might be determined by:

• How many rules were broken.
  
  
• Which specific rules were not followed.
  
  
• Current inflation rates.
  
  
• The tax years that are affected.

If you wish to learn more, click here and visit the IRS website.

How Much Is the Dishonored Check Penalty?

The Dishonored Check or Other Form of Payment Penalty is determined by the value of the bounced check or failed electronic payment.

How Much Is the International Information Reporting Penalties?

International Information Return Penalties vary based on the specific return you submit. Penalties can continue to grow until you submit a complete and accurate return or until they hit the maximum penalty limit.

How Much Is the IRS Underpayment Penalty?

The underpayment penalty is a fee the IRS charges if you don’t pay enough tax during the year, either through estimates or from your paycheck, or if you pay the tax late. Usually, you need to pay at least the same amount of tax as you did last year, or 90% of the tax for this year, to skip this penalty.

There are two types of underpayment penalties. One is for corporations, and the other is for individuals. Let’s take a look below to learn the consequences of both penalties:

1. Underpayment of Estimated Tax by Corporations Penalty

Corporations are expected to make quarterly estimated tax payments if they think they’ll owe at least $500 in taxes for the year when filing their return.

2. Underpayment of Estimated Tax by Individuals Penalty

If an individual doesn’t pay enough tax through withholdings or estimated tax payments, they may face an underpayment of the IRS estimated tax penalties. Here are the consequences:

• The penalty is calculated based on the amount you underpaid.
  
  
• It factors in how long you haven’t paid the right amount.
  
  
• The penalty rate is determined by the IRS interest rate for underpayments, which can change quarterly.
  
  
• The taxpayer typically needs to pay at least 90% of their current year’s tax or 100% of the tax shown on their last year’s return to avoid this penalty.

Avoid IRS Estimated Tax Penalty

To avoid the IRS estimated tax penalty for underpayment, you should do the following:

For Corporations

• Pay your estimated taxes in installments if you think you’ll owe $500 or more for the year after subtracting any credits.
  
  
• Make these installment payments by the 15th day of the 4th, 6th, 9th, and 12th months of your tax year. If the due date falls on a weekend or federal holiday, pay by the next working day.
  
  
• Use electronic funds transfer to pay your estimated tax installments.
  
  
• If you’ve paid too much in estimated taxes, get a fast refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. See the instructions for Schedule J, Part III, line 15, for how to do this.

For Individuals

You can dodge the Underpayment of Estimated Tax by Individuals Penalty if:

• The tax you owe according to your filed return is under $1,000, or
  
  
• You’ve paid at least 90% of this year’s tax or 100% of last year’s tax shown on your return, going with the smaller amount.

What Triggers the IRS Underpayment Penalty?

The IRS underpayment penalty is triggered for both corporations and individuals when they don’t pay enough of their expected tax liability through estimated tax payments or withholding throughout the tax year. Here’s what triggers the penalty:

For Corporations

• Corporations typically face this penalty if they don’t make large enough estimated tax payments each quarter.
  
  
• The penalty is triggered if a corporation expects to owe $500 or more in taxes and doesn’t meet its quarterly payment requirements.

For Individuals

• Paying less than 90% of the tax owed for the current year.
  
  
• Owing more than $1,000 in taxes after subtracting withholdings and credits. So, even if individuals pay 90% of their overall tax liability, they could still face a penalty if the amount remaining after withholdings and credits is more than $1,000.
  
  
• Paying less than 100% of the tax liability shown on the previous year’s return (110% if adjusted gross income is more than $150,000).

IRS Underpayment Penalty Rate

The IRS underpayment penalty rate is the interest rate the IRS charges if you don’t pay enough of your taxes during the year. This rate can change every three months, and it’s based on how much tax you didn’t pay on time.

The current year (2024) quarterly interest rate for underpayments (corporate and non-corporate) is 8%. For Large Corporate Underpayment (LCU), it’s 10%.

Note: The rates constantly change based on different factors. It’s advisable to stay up-to-date with current compliances through the IRS website and consult with experts.

Interest on an IRS Tax Penalty

The IRS charges interest if you don’t pay your taxes, penalties, or extra charges by the due date. This interest still applies even if you get an extension to file your taxes. If you pay too much tax, the IRS will pay you interest on the extra amount you paid.

The rates for both underpaying and overpaying taxes can change every three months, but these changes won’t affect the interest rate for past periods.

IRS Late Payment Interest

IRS Late Payment Interest is the interest the IRS charges on any taxes you owe but haven’t paid by the due date. It’s like interest for a late loan payment, and it keeps adding up until you pay the full amount you owe. This interest is calculated from the deadline of your tax payment until the date you actually pay.

The rate is determined by the federal short-term rate plus 3%, and it can change quarterly.

How to Pay an IRS Tax Penalty?

You can make full or partial payments to the IRS, even as part of a payment plan or installment agreement. But remember, penalties and interest will keep adding up until you’ve paid off the whole amount.

You can pay through:

• Pay Now option (by creating an IRS online account).
  
  
• Pay from your bank account.
  
  
• Pay by Debit Card, Credit Card, or Digital Wallet.

How to Remove or Reduce an IRS Tax Penalty?

The IRS might be able to remove or reduce some penalties if you had a good reason and could explain why you couldn’t pay your taxes on time.

Check out more about penalty relief on the IRS website for further details.

How to Dispute an IRS Tax Penalty?

If you think the amount you owe isn’t right, you can challenge the penalty.

Call the IRS for free using the number in the top right corner of the letter they sent you, or write a letter explaining why the penalty should be reviewed. Sign your letter and send it with any proof to the address on your notice.

Have this information ready when you call or write:

• The notice or letter from the IRS.
  
  
• Which penalty you’re questioning (like a late filing fee for 2022)
  
  
• A reason for each penalty you believe should be canceled

Follow any specific instructions or deadlines in the IRS’s notice or letter to dispute the penalty. If you didn’t get a notice or letter, you can get telephone assistance through the IRS website.

How to Avoid a US Tax Penalty?

To dodge a penalty, make sure to file correct tax returns, pay your taxes on time, and submit any required information forms promptly. If you’re unable to meet these requirements, you have the option to:

Apply for an Extension of Time to File

If you need extra time to prepare your tax return, you can apply for an extension of time to file it. Remember, this won’t give you more time to pay any taxes you owe. Setting up a payment plan can make it easier to pay gradually.

Apply for a Payment Plan

If you can’t pay all your taxes or penalties right away, pay as much as you can now and apply for a payment plan. This can help lower any future penalties by arranging to pay over time.

Note: IRS tax laws and penalties can change significantly with time, so it’s important to check the specific rules and regulations on the IRS website or consult with a tax professional for personalized advice.

FAQs on US Tax Penalty

What Triggers a US Tax Penalty?

Answer: You’ll get a penalty if you file your taxes late, pay your taxes late, underpay estimated taxes, or make significant errors on your tax return.

How Does a State Tax Penalty Apply?

Answer: Penalties are typically imposed by late filing or payment, underpayment of taxes, or inaccurately reporting income. Each state has its own set of rules that determine when penalties are applied.

Is the US Tax Penalty for State Tax Deductible?

Answer: US tax penalties and fines that an individual incurs for breaking local, state, and federal regulations are never tax-deductible.

How do I Dispute a State Tax Penalty?

Answer: To dispute a penalty, you typically need to contact your state’s tax authority directly, either through a written appeal or by following the dispute resolution process outlined in your penalty notice.

What Triggers an IRS Tax Penalty?

Answer: US Federal or IRS tax penalties are triggered by various factors:

• Information return mistakes.
• Failure to file.
• Failure to pay.
• Accuracy-related mistakes.
• Erroneous claims for refund or credit.
• Failure to deposit.
• Mistakes of Tax preparers.
• Dishonored checks.
• Underpayment of estimated tax by corporations.
• Underpayment of estimated tax by individuals.
• Failure of international information reporting.

How Much Are the IRS Penalties for Non-Compliance with the Tax Law?

Answer: IRS penalties for non-compliance with tax law can vary based on different situations or types of mistakes. The brief description is given below:

• Failure-to-File: Up to 5% of unpaid taxes per month, maxing at 25%.
  
  
• Failure-to-Pay: Generally, there is 0.5% per month of unpaid taxes, up to 25%.
  
  
• Accuracy-Related: 20% of the underpayment amount.
  
  
• Underpayment of Estimated Tax: Varies based on unpaid amount and duration.
  
  
• Dishonored Payment: A flat fee or percentage based on the amount etc.

It’s always advised to keep current with new updates through the IRS or experts.

What Is the IRS Late Payment Interest Rate?

Answer: This rate is determined by the federal short-term rate plus 3%, and it can change quarterly. Check with the IRS or consult a tax attorney.

Can the Failure-to-Pay and Failure-to-File Penalties Apply at the Same Time?

Answer: Yes, both penalties can apply simultaneously.

What Should I Do If I Disagree with a Penalty?

Answer: If you disagree with a penalty, you can dispute it by calling the toll-free number on your notice or by writing to the IRS, explaining why the penalty should be reconsidered.

How can I Avoid the US Tax Penalty?

Answer: To avoid a penalty, file the correct tax returns, pay your taxes on time, and submit any required information forms as soon as possible. If you are unable to satisfy these requirements, you can:

• Apply for an extension of time to file.
• Apply for a payment plan.

Can I Get Relief from an IRS Tax Penalty?

Answer: Yes, the IRS offers penalty relief for those who qualify, such as first-time penalty abatement or reasonable cause relief for those with extenuating circumstances.

What Should I Do If I Can’t Afford to Pay My Taxes?

Answer: If you can’t pay in full, you should still file your return and pay as much as you can to minimize penalties. Think of applying for an IRS payment plan.

Is There a Penalty for Filing an Amended Return to the IRS?

Answer: No, there’s no penalty just for amending a return. However, if the amendment results in additional taxes owed, you may owe interest or penalties on the unpaid amount if it’s paid after the original due date.

Note: Modifications to your federal tax return could impact your state tax obligations. To learn how to amend your state tax return accordingly, please reach out to your state tax department.

Which One Is the IRS Tax Penalty Form?

Answer: The IRS tax penalty form is Form 2210.

Where Can I Find More Information About US Tax Penalties?

Answer: For detailed information and guidance, visit the official IRS website or consult with a tax professional.

Final Words

As we wrap up our comprehensive guide on “US tax penalty,” remember the importance of filing your return and paying taxes on time to avoid penalties and interest. If you can’t pay in full, file your US tax return by the due date and pay as much as you can to reduce penalties. The late filing penalty is 5% per month of the unpaid tax, maxing out at 25%. Filing an extension helps avoid this penalty but doesn’t extend the payment deadline. The failure-to-pay penalty is 0.5% per month, also capped at 25%.

Both penalties can’t exceed 25% combined in the first five months. Interest accrues on any unpaid tax after the payment deadline, with rates changing quarterly. Always stay informed and proactive about your tax responsibilities to avoid unnecessary financial burdens.