4 Types of Tax Penalties

Whether you’ve made an innocent mistake on your tax return or intentionally avoided paying your taxes, the IRS has a range of penalties to enforce compliance. Understanding these penalties and their potential financial ramifications is crucial for taxpayers seeking to avoid costly consequences. In this guide, we delve into the world of IRS tax penalties.

1. Information Return Tax Penalty

Information returns are forms taxpayers use to report certain types of income, payments, transactions, or other financial activities to the IRS. Examples of information returns include Form W-2 for reporting wages and salaries and Form 1098 for reporting mortgage interest paid.

If a taxpayer or a business fails to file the required information returns or submits incomplete or incorrect information, the IRS may assess penalties. The penalty is $50 per return not filed.

However, the IRS provides certain exceptions and relief provisions for reasonable cause or uncontrollable circumstances that may have led to the failure to file or furnish information returns.

2. Failure to File Penalty

When an individual or business fails to file their tax return by the designated due date, the IRS may assess a penalty on the amount of taxes owed. The penalty is calculated based on the time period the tax return is late, and it can be quite significant.

To avoid or minimize the penalty, filing your tax return by the deadline, typically April 15th for most individual taxpayers, is crucial. However, this deadline may vary depending on weekends, holidays, or specific circumstances. If you are unable to file your return on time, you can request a tax filing extension from the IRS, which will give you additional time to file your return without incurring the failure to file penalty.

If you fail to pay the full amount of taxes you owe to the IRS by the tax deadline, a failure to pay penalty may apply. The penalty is based on a percentage of the unpaid taxes. The IRS may also charge interest on the unpaid tax amount, in addition to a failure to pay penalty. The interest is typically compounded daily and is based on the federal short-term rate plus a certain percentage.

3. Erroneous Claim for Refund or Credit

An erroneous claim for refund or credit refers to a situation where a taxpayer submits a claim to the tax authorities seeking a refund or credit that is based on inaccurate or false information. This can occur when the taxpayer mistakenly believes they are entitled to a refund or credit, intentionally tries to deceive the tax authorities, or unintentionally makes an error on their tax return.

When an individual or entity files a tax return, they may claim certain deductions, credits, or refunds to reduce their overall tax liability or obtain a refund for overpaid taxes. If the tax authorities discover the error or deliberate fraud, they may deny the claim and assess penalties and interest on the amount of the erroneous refund or credit. The penalties can include fines, additional taxes owed, and potentially criminal charges in cases of intentional fraud.

4. Failure to Deposit Penalty

When employers have employees, they are generally required to withhold certain taxes from their employees’ wages and periodically deposit those taxes with the IRS. These tax deposits are used to fund various government programs and operations. The specific deposit requirements depend on the size of the employer’s payroll and the amount of taxes owed. If an employer fails to make a required tax deposit by the due date, the IRS may assess a failure to deposit penalty.

Wiesner & Frackowiak, LC, offers a wide range of legal services to assist you in overcoming your financial challenges. Whether you need assistance with Chapter 7 or Chapter 13 bankruptcy filings, tax debt negotiation, or IRS dispute resolution, our knowledgeable attorneys are ready to guide you every step of the way. Contact us to schedule a confidential consultation with one of our experienced attorneys.

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