The IRS charges penalties when taxpayers don’t satisfy their obligations. For instance, filing tax returns late, not paying the full amount due, or providing inaccurate information on returns can lead to tax penalties.
Even if you’re assessed penalties and interest, there are tax resolution strategies that can lower your tax debt. Available options may include tax penalty abatement, installment agreements, and appeal. To find out which tax relief strategy best fits your situation, call The Law Office of Jin Kim at (916) 299-9913 for a free tax consultation.
Tax Penalties vs. Interest
The original purpose of the tax penalty is to serve as a deterrent and discourage late filing, late payment, and other actions detrimental to tax collection. The idea is that if you don’t want to owe a tax penalty, then you will file your tax return on time and pay what you owe before the deadline. However, tax penalties are not just deterrents, but also a major source of income for the American government.
The underlying policy behind the assessment of interest on tax debt is largely similar to tax penalties, but with a subtle difference. In terms of similarity, the assessment of interest on tax debt encourages the timely payment of taxes. However, the assessment of interest is also a prudent business practice for the government; by not paying what is owed to the government on time, the taxpayer is effectively loaning money, and when someone loans money an interest rate applies to compensate the lender and protect the lender from inflation.
Types of Tax Penalties
The penalty on your tax bill will depend on the violation of tax laws and regulations. Here is a short overview of some of the most common penalties:
- Accuracy Penalties – the accuracy-related penalty is assessed if the IRS determines that your tax return is inaccurate due to negligence or a substantial understatement in tax owed. This is one of the most common civil tax penalties. There can be various reasons why the IRS will deem your tax return inaccurate. One example is when you understate your income. Another is when you were negligent in filing your tax return or adopted erroneous legal theories for an understatement in tax. The rate for accuracy penalties is 20% of your tax bill.
- Fraud Penalties – Fraud implies a willingness and conscious knowledge on the part of the person committing it. Thus, mere carelessness will not result in a fraud charge. However, when the IRS is convinced that you indeed committed fraud in completing your taxes, it can add up to 75% of the under-reported amount as a penalty.
- Penalty for Employers – Employers are mandated under the law to withhold payroll taxes and remit those funds to the government. Unfortunately, it’s common for employers to spend payroll tax withholdings on business expenses and fail to remit those funds on time. The penalty for payroll tax violations will depend on how late the payments are.
- Penalty for Failure to File Information Returns – this is another penalty that is levied on employers. Employers are required by law to file reports with the IRS – such as Form 1099 which shows payments made to service providers and independent contractors. As with the above penalty, the amount may vary for this penalty, depending on the type of form which was not filed.
- Penalty On Top of Penalties – As though being levied a penalty wasn’t enough, the IRS will assess a penalty if you fail to pay the first amount of penalties levied. The amount varies, around the range of .25% to 1% per month, depending on the amount of the penalty you failed to pay.
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