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What Tax Penalties Exist Under the New Tax Law?

ProActive Tax SolutionsIRS What Tax Penalties Exist Under the New Tax Law?
tax-penalties-exist-under-new-tax-law?

What Tax Penalties Exist Under the New Tax Law?

How you define a tax penalty will help to determine what has changed under the new tax law. Some changes, like those made to prior allowable deductions like providing a transportation fringe benefit to your employees, or the entertainment deduction now feel like penalties. We’ll leave those for another time. Let’s talk about the standard penalties.

Now, we know, you don’t like to think about tax penalties. However, life happens and when it does, as a business person, it helps to know what you can expect. If you are late filing your tax return or in paying your tax liabilities you could be in for penalties.

According to the IRS, 10 million taxpayers face an estimated tax penalty each year.

tax-law-myths-truthsLet’s Start by Dispelling Some Tax Penalty Myths

Myth – Filing an extension request protects you from paying your taxes in full by April 15th.  

Truth – An extension request does not protect you from the need to pay your tax liability on the date your tax return is due.

Myth – As long as you pay all the tax due by your tax return filing date, you don’t need to file your estimated taxes on time.

Truth – Estimated taxes are due quarterly and nonpayment or underpayment can trigger a penalty.

If you pay by check, be sure you have the funds to cover it, because a bounced check will accrue a penalty.

Those penalties and the added interest will stop accruing at the time you pay the balance of tax and any penalties owed.

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What if I don’t have the funds to pay my taxes on time, in full?

The failure to pay penalty is charged on a monthly basis, until your tax liability is paid in full. If you can’t pay the full amount of taxes owed by the tax return filing date, the IRS offers an Installment Agreement with taxpayers. This could reduce future failure to pay penalties.

The following information on calculating tax penalties is provided from the IRS site.

Failure to file: Internal Revenue Code §6651(a)(1)

  • 5% of unpaid tax required to be reported
  • Reduced by the “failure to pay” penalty amount for any month where both penalties apply
  • Charged each month or part of a month the return is late, up to 5 months
  • Applies for a full month, even if the return is filed less than 30 days late
  • Income tax returns are subject to a minimum late filing penalty when filed more than 60 days after the return due date, including extensions. The minimum penalty is the LESSER of two amounts – 100% of the tax required to be shown on the return that you didn’t pay on time, or a specific dollar amount that is adjusted annually for inflation. The specific dollar amounts are:
    • $210 for returns due after 1/1/2018
    • $205 for returns due between 1/1/2016 and 12/31/2017
    • $135 for returns due between 1/1/2009 and 12/31/2015
    • $100 for returns due before 1/1/2009

Failure to pay tax reported on return: Internal Revenue Code §6651(a)(2)

  • 0.5% of tax not paid by due date, April 15; 0.25% during approved installment agreement (if return was filed on time, and taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy
  • Recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid or until 25% is reached
  • Full monthly charge applies, even if the tax is paid before the month ends.

Failure to pay tax not reported on original return and not paid in full within 21 days of the date of notice and demand; 10 business days if the amount in the notice and demand equals or exceeds $100,000: Internal Revenue Code §6651(a)(3)

  • 0.5% of tax not paid by due date in notice – generally 21 calendar days from notice date, 10 business days if the balance equals or exceeds $100,000; 0.25% during approved installment agreement (if return was filed on time, and taxpayer is an individual); 1% if tax is not paid within 10 days of a notice of intent to levy
  • Recurring charge on the remaining unpaid tax each month or part of a month following the due date, until the tax is fully paid
  • Full monthly charge applies, even if the tax is paid before the month ends.

Failure to pay proper estimated tax: Internal Revenue Code §6654

  • Estimated tax payments are generally required, if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits.
  • Generally calculated on Form 2210
  • We calculate the penalty separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.
  • See Publication 505 for more information.

Dishonored check or other form of payment: Internal Revenue Code §6657

  • For payments of $1,250 or more, the penalty is 2% of the amount of the payment.
  • For payments less than $1,250, the penalty is the amount of the payment or $25, whichever is less.

corte-madera-tax-helpSolid Tax Planning Can Help You Avoid Penalties

Planning ahead is a great way to stay on track and avoid penalties. We’d be happy to help you plan for your future. Call our Corte Madera tax office at 415-924-6240 or use the Contact Us button located at the top of this page to send us an email.