Top 10 Tax Penalties And How To Avoid Them

Like giving your hard-earned cash to the government? Failing to file or pay your taxes on time could lead to some hefty tax penalties issued by the IRS and you can calculate your tax penalties by using tax penalty calculator. As a freelancer, gig worker or self-employed person, every dollar amount matters, so it’s important to understand IRS penalties and know how to avoid them. Below are the top IRS penalties and the best ways to avoid them.

10 Tax Penalties You Can Avoid

1. Failure to file

Filing your tax return is a simple way to save on penalties. Even if you can’t afford to make the payment, file your taxes anyway or file for an extension. The penalty for not filing is significantly greater than the penalty for failing to pay. The failure-to-file penalty can be up to 25% of your unpaid taxes or 5% for each month owed. So file your taxes on time to avoid late filing penalties.

2. You filed on time but didn’t pay all of your balance due

So you’ve filed your tax return on time, but for one reason or another, you didn’t pay some or all of the taxes you owed by the due date. Missing the payment deadline could lead to a failure-to-pay penalty and interest on the unpaid balance.

The failure-to-pay penalty is one-half of one percent per month, or part of a month, with a maximum of 25% on the unpaid tax balance from the due date to when it is fully paid. So the sooner you pay, the less you will owe. You can set up a payment plan or use a credit card to make the payment.

3. Combined penalties

Failing to file on time and failure to pay will result in a combined penalty. The Failure to File penalty is reduced to the Failure to Pay Penalty amount for that month. So you will receive a combined penalty of 5% for each month, or part of the month, that your return was late.

4. Underpayment

You may receive an underpayment penalty if you don't pay enough of your estimated quarterly taxes. The underpayment penalty is based on how long its overdue and how much you owe. Plus you may receive a Failure-to-Pay penalty as well. But the good news is you can avoid this penalty by either paying 90% of this year's tax or 100% of last year's tax or 90%.

5. False return

Even for a tax accountant, navigating IRS tax returns is not an easy task. However, the IRS understands that honest mistakes at tax time can happen. As long as there isn't any fraud or criminal activity evidence, the IRS will issue a 20 percent penalty. So be sure to double-check your tax return for accuracy and file an honest tax return.

6. Interest

As if receiving IRS penalties wasn’t enough of a headache, the IRS charges interest on any unpaid tax from the due date until you pay the amount in full. So you will continue to accrue interest on your taxes, penalties and interest until you’ve paid the full amount of what you owe. You may even receive another penalty for not paying the interest.

7. Unreported foreign account penalties

Perhaps you work abroad or spend some time overseas and have a foreign bank account. It’s important to report the bank account because withholding this information could lead to penalties up to $25,000 and even jail time. To avoid these penalties, file a Foreign Bank Account Report (FBAR).

8. Accurate mileage reporting

When it comes to the IRS, it’s never a good idea to give a random estimate. Instead, accurately report each mile you plan to deduct in a journal or record book. You will also  need to save the relevant car-related receipts. If you cannot show proof of your mileage rates, you may receive a 25% penalty and need to pay additional tax. Oh, and you will be charged interest too!

9. Home office deduction penalty

The IRS allows self-employed people to take a home office deduction if they work from home regularly, and the home office is the primary place of business. When making home office deductions, be sure to deduct only what pertains to your actual office, or you may receive a penalty for misreporting tax information. The IRS may decide you don’t qualify for the home office deduction, which means a raise in your taxable income and the income qualifies for the self-employment tax.

10. Charitable contributions

Donating to a charity is a way to contribute to a great cause, all while earning a tax deduction. However, the charity or organization must have IRS approval to qualify and must provide you with a receipt of donation as proof. Without IRS approval or an adequate receipt, you could receive a penalty for taking the deduction. On the IRS website, you can also use the Tax Exempt Organization Search tool to confirm whether a charity or organization is eligible for a donation tax deduction.

How can FlyFin help?

Filing taxes can seem overwhelming, and getting a full understanding of the qualifications for deductions takes time and effort. But with FlyFin, tax filing is effortless.

FlyFin's A.I.- powered tax engine finds every possible deduction to save you time and money. You can also use FlyFin’s 1099 tax calculator to help with filing self-employment income tax.

When you understand and use these strategies, you can make better tax-filing decisions and pay less taxes.

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.