Tax Penalties 101

Avoid These Simple Tax Return Mistakes

Tax Penalties 101
February 1, 2016

The Internal Revenue Service has plenty of ways to penalize you for mistakes on your tax return. Some of these potential penalties are so convoluted and complex that there may well be disagreement within the IRS on when they apply. However, most people accrue tax penalties for very simple mistakes. Here are some of the more common yet easily avoidable mistakes.

  • Failing to File – Do you really think the IRS will forget about the fact that you did not file your tax return? It may take some time, but the IRS will eventually catch up with you. Expect little sympathy if you do not file. The IRS is willing to work with people to make payments, but if you make no effort at all, you are subject to the non-filing penalties of 5% per month of the due taxes, up to 25% of your unpaid tax bill.

Many people simply put off filing until it is too late, and think that doing nothing is better than attempting to file a potentially wrong return. You can deal with that problem by filing an extension with Form 4868 to buy time. Note that 4868 does not buy you time to pay, just time to file. You still have to make a reasonable estimate of your expected tax payments.

Of course, the best solution to the problem is to keep your records organized throughout the year to make the April filing easier.

  • Not Making Payments – If you do not pay the taxes that you owe by April 18th (normally April 15th), another penalty applies, just not as large of a penalty as for non-filing. The monthly penalty is 0.5% of your unpaid taxes, up to 25% total. That applies even with an extension, since Form 4868 requires you to estimate your taxes and send in your payment with the form.

The IRS does allow installment programs and other provisions in some cases that can reduce or eliminate penalties and interest, so it really is in your best interest to explore options rather than to send in partial payments on your own (or avoid payment altogether).

  • Forgetting Signatures – If you fail to sign your paper form, it is as if it was never submitted. That is even true with e-forms, where you "sign" via a PIN number. Double-check to make sure that you sign your form. Otherwise, you will be subject to the non-filing penalties unless you send in a properly signed form as well — but you risk IRS confusion with two submitted forms.
  • Not Making Quarterly Payments – Self-employed individuals must make quarterly estimated tax payments throughout the year so the government can receive regular cash flow from estimated taxes in the same way that employers take out monthly deductions for taxes. Filing in a lump sum at the end of the year can result in an "underpayment" penalty even if you paid the full amount of taxes due. You did not pay it at the right time.

You can avoid this penalty by making sure estimated taxes are regularly paid. For independent contracting jobs where the income varies greatly, you can use the "safe harbor" provision by paying 100% of last year's tax liability or 90% of this year's estimate, whichever is less. If you also have a salaried job or your spouse has one and you file jointly, you can cover the taxes by having extra monthly taxes withheld on the salaried position. That spreads the taxes out in roughly the right time period.

  • No Apparent Health Insurance – The Affordable Care Act requires that you have health insurance or you must pay a penalty (for 2016) of the greater of 2.5% of your income, or $695 per each adult not covered, plus $347.50 per child not covered. Each 1040-style form has a box to check for "Health care: individual responsibility." Fail to check this box and the IRS has no way to know that you have health insurance; thus, you will be assessed a penalty.

With a little attention and vigilance, you can reduce your chances of simple errors that could result in tax penalties and/or audits. Why give the IRS any more of your money than you have to?


Photo ©iStock.com/cyano66

  Conversation   |   12 Comments

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Steffanie | 02.01.16 @ 15:01
After reading this, I am thankful we have an accountant who does a superb job, so I don't have to remember everything.
Elaine | 02.01.16 @ 15:03
Glad I have an accountant that takes care of me. I would be so prone to missing something if it was left up to me.
Nancy | 02.01.16 @ 15:03
Those are some major offences to make. I never want to mess with the IRS.
Erin | 02.01.16 @ 15:03
Most of this seems like it is common sense. It's good to have the reminder though. We file electronically, so we don't have to worry about the signatures. That is probably where I would mess it up. lol
Irene | 02.01.16 @ 15:03
I was lucky, I actually made a mistake on my taxes once and they just corrected it and added it to my refund
Crystal | 02.01.16 @ 15:06
Some basic items that could really cause some financial issues. No ones wants to receive a letter from the IRS. Thanks for these reminders!
Meredith L | 02.01.16 @ 15:06
I will probably have the health care penalty but looking into exemptions from it since we had hardships last year - you know, like foreclosure. It's amazing how you try to do the right thing and make a living but someone's always got a hand in your pocket!
Sara | 02.01.16 @ 15:08
With tax season in full swing these are some good tips.
Sarah | 02.01.16 @ 15:09
Taxes... scary stuff. Just ask Al Capone. I like my software and a double person double check. So far we've done well.
trish | 02.01.16 @ 15:10
Love that we have an account to make sure we cross all our T'S and dot our i's
Jackie | 02.01.16 @ 15:12
Unless you fill out a simple short form, it's wise to have an accountant help with taxes.
Carla Truett | 02.01.16 @ 15:13
I forgot to send in a check for $16 once and I got audited. It won't happen again.
$commenter.renderDisplayableName() | 12.08.16 @ 18:13
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