Top 10 Ways to Avoid IRS Penalties
The best way to stay out of trouble with the IRS is to be punctual, honest, and accurate when filing your return. Here are some tips for minimizing those dreaded IRS penalties, or avoiding them altogether.
- File your tax return on time to avoid a monthly penalty of 5% of the amount due.
- If you file for a six-month extension, be sure to include 90% of your estimated tax payment, or whatever you can afford to reduce the underpayment penalty.
- If possible, pay your tax debt in full by April 15 to avoid the monthly penalty of 0.5% (or 1%, if the IRS issues a notice of intent to levy).
- If you don’t have the money to pay your taxes in full, consider a bank loan rather than an IRS Installment Agreement. The IRS sets its interest rates at 3% higher than the current federal short-term rate.
- Under-reporting your income or overstating your deductions may lower your tax debt, but you’ll be subjected to some stiff penalties if you’re caught. The penalty for underpaying your taxes by $5,000 or more than 10% (whichever is larger) is 20% of the amount owed.
- No matter how tempted you may be, do not lie on your tax return. If you’re caught, you may be assessed a penalty of 75% of the amount you underpaid, or even charged with fraud by the IRS.
- Keep adequate records on hand, just in case you need to show the IRS that you made a good faith effort to comply with federal tax laws.
- You may receive a nice refund if you have too much withheld from your paycheck, but you’ll be missing out on interest you would have otherwise earned.
- Know the tax rules, or hire someone who does. The penalty for negligence or disregard of tax rules and regulations is 20% of the amount underpaid.
- The IRS may be willing to reduce or remove penalties if you can provide them with a good (and verifiable) reason, such as death in the family, natural disaster, incarceration, major illness, or a lengthy time of unemployment.