Although most people in the United States know that April 15 is the deadline every year to file an individual tax return, they’re often unaware of penalties they might incur despite filing on time. The Internal Revenue Service checks your tax return for errors and sends a bill if a mistake results in you owing more money. Interest and a penalty are assessed in cases of late payment, but penalties can be assessed for other reasons as well.
Failure to pay all the tax you owe by the deadline for filing your tax return results in a late payment penalty. The assessment is calculated at one-half of 1 percent of the tax owed for each month or partial month after the due date, up to a maximum of 25 percent. This penalty escalates to 1 percent per month starting 10 days after the IRS issues a notice of intent to levy. Any unpaid amount incurs a late payment penalty even if the cause is discovery of an error in the return you filed on time.
A mistake on your tax return that increases the tax owed can also result in a penalty related to estimated tax. This is triggered by insufficient payment of tax during the calendar year. It is assessed in addition to the penalty for not paying by the April 15 deadline. Estimated tax payments are required if you don’t pay enough tax via withholding. A penalty is charged if you didn’t meet required minimum payments during the tax year. You can even owe this penalty if you pay all your tax liability by April 15.
Filing an incorrect tax return that substantially understates your tax liability allows the IRS to assess an extra penalty of 20 percent of the understated tax. A substantial understatement by individuals is defined as 10 percent of the correct tax, with a minimum of $5,000. Avoiding this penalty is possible if you relied upon a tax professional for advice about tax treatment that the IRS subsequently rules is incorrect. You can also avoid this penalty by using an IRS form to disclose your reason for a tax position that the IRS later judges erroneous.
Another penalty for 20 percent of the understated tax arises in cases of negligence, which includes failing to make a reasonable attempt to comply with tax laws, failure to exercise reasonable care to prepare a tax return or inadequate records to substantiate tax reporting. The IRS also charges this penalty if you are careless or reckless in disregarding tax rules. Avoiding this penalty is possible if you acted in good faith, such as following the advice of a tax professional.
Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.