IRS Penalties and Interest

There are numerous rules that taxpayers must follow to prevent incurring penalties and interest. Below you will find a breakdown of some of the more common violations. There are many others that are not mentioned, so you may incur penalties and interest even if you satisfy the conditions described below.

One of the most expensive penalties is Failure to File. You may be subject to this 25% penalty if you do not file your tax return by the due date or the extension date. The 2019 tax year due dates for calendar year taxpayers are:

  • Form 1040 Individual Tax Return original date 4/15/2020 or extension date 10/15/2020
  • Form 1065 Partnership Tax Return original date 3/15/2020 or extension date 9/15/2020
  • Form 1120 S-corporation Tax Return original date 3/15/2020 or extension date 9/15/2020
  • Form 1120 C-corporation Tax Return original date 4/15/2020 or extension date 10/15/2020

Another very expensive penalty is Failure to Pay. The name says it all. If you have a tax bill and you do not pay it then you may be subject to this 25% penalty. Some taxpayers get themselves into trouble because they file an extension and wait until the extension date to pay the tax they owe. Doing so violates the Failure to Pay rule because tax is due on the original date, not the extension date. The Failure to Pay penalty may be combined with the Failure to File penalty, and when that is the case the cost to the taxpayer is astronomical.

Estimated Tax Payments may lead to penalties and interest. Certain individuals must pay quarterly Estimated Tax Payments throughout the tax year. The 2019 payments are due 4/15/19, 6/17/19, 9/16/19 and 1/15/20. The amount of each payment depends on the taxpayer’s 2019 tax liability. At the beginning of the tax year, the taxpayer decides how much income they expect to earn in the next twelve months. If the estimate is too low, which makes the Estimate Tax Payments to low, a penalty is charged based on the difference between the actual payment and the required payment.

If you are a shareholder in an S-corporation, a partner in a Partnership or receive Form 1099-MISC you are a pretty good candidate for Estimated Tax Payments. If you are an employee who receives a W-2 with the proper amount of taxes withheld from each paycheck you are an unlikely candidate for Estimated Tax Payments. Check on it just to be sure.

Similar to individuals, certain corporations must make Estimated Tax Payments.

Penalties and interest honorable mentions include Evasion of Tax, Excess Contributions to Retirement Plans, Premature Distributions from Retirement Plans and Undisclosed Foreign Financial Assets. Ignorance is not a defense of the law, so even though your intention is to pay the correct amount of taxes on time you may end up paying penalties and interest if you violate the rules. A good CPA can help you understand and avoid these unnecessary expenses.

Joe Wright CPA PLLC provides the information in this blog as a general guide. Tax laws are extremely complex, and every taxpayer is unique. Some or all of this information may or may not apply to you. We provide simplified situations to clarify some of the major aspects and highlights of the topic at hand. Some of the language used is casual and may be misconstrued. Please make an appointment with us soon to discuss your particular circumstances.