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In fiscal year 2017 that ended last September, 31 million taxpayers who filed individual, estate or trust tax returns faced penalties totaling more than $11 billion \u2013 and that\u2019s just the beginning. An additional 6.7 million people paid $3.1 billion in ACA penalties, and 1.2 million people paid $1.6 billion in additional tax on early distributions from their IRAs. The bad news is that there are more kinds of penalties than many taxpayers might think. The good news is that there are ways to avoid, reduce or eliminate tax filing penalties.<\/p>\n
Tax return penalties can impact just a few thousand people to more than 10 million and range from an average cost of $91 to more than $60,000. Here they are, ranked from most common to least common, with a few tips along the way to avoid or minimize them.<\/p>\n
Failing to pay taxes by the April deadline is the most common reason taxpayers get IRS tax penalties. The failure-to-pay penalty<\/a> is 0.5 percent of taxes due each month they go unpaid, maxing out at 25 percent.<\/p>\n How to avoid the failure-to-pay penalty:<\/em><\/strong> Pay taxes by the April deadline. If taxpayers can\u2019t pay by the deadline, they can look into other payment options, such as using a credit card, to avoid the penalty. Taxpayers who filed an extension must pay at least 90 percent of the taxes they owe by the April deadline, or face the failure to pay penalty when they file their extended return<\/em>.<\/em><\/p>\n How to minimize the failure-to-pay penalty:<\/em><\/strong> Pay as much as possible by the April due date. Taxpayers can request an extension to pay of up to 120 days, or set up a payment plan with the IRS, called an installment agreement. Many IRS installment agreements allow taxpayers to pay their taxes due over a period of up to 72 months or longer if they\u2019re in a hardship situation. Getting into a payment plan also reduces the failure-to-pay penalty from 0.5 percent to 0.25 percent per month. The IRS offers <\/em>several other options<\/em><\/a> for people who owe large amounts or who are in financial hardship situations.<\/em><\/p>\n Paying taxes before the April deadline isn\u2019t always enough to avoid penalties. Taxpayers must follow the \u201cpay-as-you-go\u201d rules during the year to avoid estimated tax, or underpayment, penalties<\/a>. During filing, tax preparation software automatically calculates this penalty.<\/p>\n How to avoid the estimated tax penalty:<\/em><\/strong> As long as taxpayers pay (by the April deadline) 90 percent of the taxes they owe for the year or 100 percent of the taxes they owed last year, they won\u2019t owe the penalty. Usually, taxpayers who have enough wage withholding won\u2019t face this penalty. However, tax reform changes<\/em> mean employees may need to do a <\/em>withholding checkup<\/em><\/a> to make sure they will avoid the penalty for 2018 returns. Self-employed people, retired people and taxpayers with other types of income (like investment income) should make sure they pay enough in quarterly estimated tax payments during the year or increase their withholding, if possible. Taxpayers rarely get abatement of the estimated tax penalty, so it\u2019s best to find an exception when filing the return.<\/em><\/p>\n The requirement to carry minimum essential health insurance coverage came with an increasing tax penalty each year since the ACA was implemented in 2014. Although the Affordable Care Act penalty<\/a> was repealed for 2019, taxpayers won\u2019t get a pass on the requirement to have health insurance in 2017 or 2018.<\/p>\n How to avoid the health insurance mandate penalty:<\/em><\/strong> To completely avoid this penalty, taxpayers must have had minimum essential coverage for all members of the tax household all year long \u2013 or they must qualify for one of about a dozen exemptions that apply for that year. <\/em><\/p>\n How to minimize the health insurance mandate penalty:<\/em><\/strong> Qualify for an exemption for at least part of the year. For example, a taxpayer without health insurance all year who can show financial hardship for two months would only have to pay the penalty on 10 months. Also, while it is too late to get insurance for 2017, some people may still qualify for a Marketplace <\/em>special enrollment period for 2018.<\/em><\/p>\n Failing to file a tax return is one of the most expensive mistakes a taxpayer can make. The failure-to-file penalty<\/a> is 5 percent of the taxes due each month they go unpaid, maxing out at 25 percent. This is 10 times more expensive than the failure-to-pay penalty.<\/p>\n How to avoid the failure-to-file penalty:<\/em><\/strong> Even if taxpayers can\u2019t pay their tax bill, <\/em>they should still file their return<\/em><\/a>. If they don\u2019t have the time or the paperwork to file by the deadline, taxpayers can file an extension to avoid failure-to-file penalties. <\/em><\/p>\n How to minimize the failure-to-file penalty:<\/em><\/strong> Taxpayers who missed the deadline to file a return or an extension should file as soon as possible.<\/em><\/p>\n People who save money in tax-advantaged retirement accounts, like a 401(k), generally can\u2019t take that money out early without triggering a penalty. For example, a taxpayer who distributes funds early from an individual retirement account (IRA) to pay for a home renovation could trigger a 10-percent early distribution penalty<\/a>, on top of the taxes he or she will owe on the distribution.<\/p>\n How to avoid the early distribution penalties:<\/em><\/strong> Although rules vary by the type of account, taxpayers must usually be 59\u00bd before they can withdraw money without penalty from their retirement accounts. Depending on the plan rules, taxpayers may qualify for an <\/em>early distribution penalty exception<\/em><\/a>, if they\u2019re using the money for certain purposes, like paying for college. Be aware of the exceptions, their limitations and how they apply to various plans. <\/em><\/p>\n The penalty for writing a bad check for taxes is either $25 or 2 percent of the check amount (whichever is more). And if the bad check causes a late payment to the IRS, taxpayers could also owe the failure-to-pay penalty, plus interest.<\/p>\n How to avoid the bad check penalty<\/em><\/strong>: If taxpayers don\u2019t have enough money to cover their tax bill, there may be other options, such as paying with a credit card (which will incur service fees and possibly interest), or getting an <\/em>alternative arrangement from the IRS<\/em><\/a>, like a 120-day extension to pay or a monthly payment plan.<\/em><\/p>\n Taxpayers generally don\u2019t need to worry about honest mistakes on a tax return triggering the expensive accuracy penalty<\/a>. The accuracy penalty, 20 percent of the understatement of tax, is limited to people who leave large amounts of income off their return or who are negligent in preparing their return<\/a>.<\/p>\n How to avoid the accuracy penalty:<\/em><\/strong> Taxpayers should do their best to file a complete and accurate return. When in doubt, get qualified professional\u2019s help preparing a return. <\/em><\/p>\n In terms of taxes, it\u2019s possible to save too much for retirement or medical expenses. Taxpayers can contribute only a certain amount to their traditional and Roth IRAs and their health savings accounts (MSAs and HSAs). And if their income is too high, they may not be able to contribute at all. If taxpayers contribute over the limit, they\u2019ll owe an additional tax on the excess contributions. This tax may feel like a penalty, but it\u2019s technically an excise tax.<\/p>\n How to avoid the excess contributions tax:<\/em><\/strong> If taxpayers are eligible to contribute to these plans, they should stay within the contribution limits. In some cases, taxpayers can avoid a penalty by recharacterizing contributions, but it\u2019s a good idea to see a professional for help doing this. <\/em><\/p>\n How to minimize the excess contributions tax:<\/em><\/strong> Withdraw the excess contributions and their earnings by the due date of the return, including extensions. The extra contributions won\u2019t be subject to tax, but the earnings are taxable.<\/em><\/p>\n Starting at age 70\u00bd, taxpayers must start taking required minimum distributions<\/a> (RMDs) from their retirement accounts. The penalty for failing to do so is 50 percent of the RMD. Taxpayers who are still working at age 70\u00bd can delay RMDs, but only from their current employer\u2019s retirement plan. They\u2019ll still have to start taking RMDs from IRAs and other employer plans at age 70\u00bd.<\/p>\n How to avoid the RMD penalty:<\/em><\/strong> Taxpayers can use the RMD to make a <\/em>qualified charitable distribution<\/em><\/a>, which means they won\u2019t owe taxes on the amount they contribute. <\/em><\/p>\n If accuracy penalties are expensive, fraud penalties are even steeper. Accuracy errors turn into fraud when the IRS determines that the taxpayer was intentionally evading taxes<\/a>. Fraud penalties also apply to tax identity thieves who file fraudulent returns using someone else\u2019s falsified information.<\/p>\n How to avoid the fraud penalty:<\/em><\/strong> File a complete and accurate return. Don\u2019t fabricate deductions or alter eligibility for credits. <\/em><\/p>\n The best course is to avoid penalties altogether. For people who get penalties, the IRS offers tax penalty relief<\/a> in some cases. For example, if taxpayers filed or paid late, they can use reasonable cause<\/a> or first-time penalty abatement<\/a> to request relief.<\/p>\n Taxpayers can learn more about penalty relief options<\/a> and how to get expert help from H&R Block\u2019s Tax Audit & Tax Notice Services<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" Penalties for not filing a tax return or not paying taxes are well-known, but there are many more tax penalties. Knowing how to avoid them when possible, and minimize them when unavoidable, is key.<\/p>\n","protected":false},"author":418,"featured_media":37287,"menu_order":0,"template":"","tags":[],"news-categories":[23363,23364],"class_list":["post-37286","newsroom","type-newsroom","status-publish","has-post-thumbnail","hentry","news-categories-irs","news-categories-audits-and-tax-notices"],"acf":{"post_rest_thumbnail_alt_id":null},"yoast_head":"Estimated tax penalty (9.8 million taxpayers, $1.5 billion, average $156) <\/strong><\/h2>\n
ACA health insurance mandate penalty (6.7 million taxpayers, $3.1 billion, average $463)<\/strong><\/h2>\n
Late filing penalty (2.5 million taxpayers, $3 billion, average $1,196) <\/strong><\/h2>\n
Early distribution penalty (1.2 million taxpayers, $1.6 billion, average $1,333) <\/strong><\/h2>\n
Bad check penalty (655,971 taxpayers, $60 million, average $92)<\/strong><\/h2>\n
Accuracy penalty (557,147 taxpayers, $1.1 billion, average $1,935)<\/strong><\/h2>\n
Excess contribution tax (346,968 taxpayers, $44.1 million, average $127) <\/strong><\/h2>\n
Penalty for not taking required minimum distributions (11,810 taxpayers, $6.8 million, average $576)<\/strong><\/h2>\n
Fraud penalty (2,533 taxpayers, $157 million, average $61,962)<\/strong><\/h2>\n
How to request relief for tax return penalties<\/h2>\n