5 Reasons You May Owe the IRS A Penalty

Paying taxes isn’t an easy task. There are countless deadlines to keep track of, seemingly endless forms to complete, and varying rules and regulations to understand. Working as a self-employed person or freelancer has its perks, but it also comes with responsibilities. You’re now in charge of learning the ins and outs of the IRS tax system.

Taking the time to learn the IRS tax system will help you stay on track and avoid forking over more money through penalties. There are some common reasons you may owe the IRS a penalty.

1. Failing to file a tax return

Filing a tax return is the best way to avoid an IRS tax penalty. If you don't file a return, the  IRS does not take it lightly. First, they will charge you with a failure-to-file penalty of 5% per month on the amount of taxes you owe, up to 25%.

Filing more than 60 days late will bring a minimum fine of $210, or you’ll need to pay 100% of the taxes you owe. If receiving a penalty wasn’t enough, you will also need to pay interest on the unpaid balance.

You may be able to persuade the IRS to reduce your penalties, if you have convincing reasons, such as a family member’s death, mental illness, or extended military service. But it’s best to make sure you don’t owe a tax penalty and file on time.

2. Filed on time but didn’t pay all of your balance

So you’ve filed your taxes on time, but you didn’t pay all of your balance. What happens next? The penalty for failing to pay your balance is one-half of one percent for each month you’re late, up to 25% of the unpaid amount from the due date until you pay the full balance.


If you decide to file an extension on your tax return, your timeline for payment doesn’t change. But, you can make payments through a payment plan. You can apply for an IRS installment plan to pay your taxes, and your penalty amount decreases to 0.25% per month once the plan is in place.

3. Underpayment of estimated tax penalty

When filing taxes as a freelancer or self-employed person, your estimated payments are due on a quarterly basis and are paid either from making estimated quarterly payments or withholdings held from paychecks.

Since the taxes are estimated, it can be difficult and downright confusing to determine how much to pay. If you miscalculate and underpay or don’t withhold enough taxes, you may owe a payment for underpayment, which is called the Underpayment of Estimated Tax penalty.


Let’s face it, knowing exactly how much to pay each quarter can be challenging, especially if your income or deductions change. You can avoid paying the underpayment penalty if you owe less than $1,000 in taxes after subtracting refundable credits or withholdings. Another way to avoid the underpayment penalty is if you’ve paid 90% of the tax you owe or 100% of last year’s taxes.

4. Not reporting self-employment income

There are many perks when working as a freelancer or self-employed person. With the new job title also comes new responsibilities. Now it’s your sole responsibility to file your taxes and report your self-employment income. Failing to report your income could lead to some serious fines and penalties.  

First, you’ll receive a fee on the amount you didn’t report, then you will be charged interest on that amount, and you could face some jail time for withholding information from the IRS and not filing an honest tax return.

5. Charitable donations

Donating to a charitable organization is a way to help out a good cause. The IRS allows you to write off the donation as a deduction on your tax return. But, not every charitable organization qualifies for a deduction. For the donation to count as a deduction, the charitable organization needs to have the IRS’ approval.

Also, donating to a political campaign, or pledging to make a donation in the future, do not count as charitable donations for an IRS deduction.  

If you claim a charitable deduction and the IRS determines your donation doesn’t qualify, you will have to pay a penalty of 50% of the total deduction amount, plus any interest on the penalty.

Conclusion

Penalties are the last thing we want to receive when it comes to taxes. Yet, we all make mistakes or overlook a deadline. These five common tax penalties may be the reason you owe the IRS some money, but it’s important to keep in mind that there are many other ways to earn yourself a penalty from the IRS. You can use FlyFin’s tax penalty calculator to determine exactly how much you owe the IRS.

FlyFin CPA Team

FlyFin CPA Team

With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.

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