Taxpayers Owed More Penalties In 2023 Than Ever Before: Here's How to Owe Less
Missed the April 15th tax deadline?
You’re not the only one.
Americans accrued $7 billion in tax penalties in 2023, a record-high level and a nearly 300% increase from 2022.
Introduction:
Despite everyone knowing when taxes are due, each and every year a ton of taxpayers miss the deadline.
Either life got in the way or the dog ate their W-2, but no matter the reason, the more you understand about IRS penalties and what you can do to minimize them, the less you'll have to pay.
This is Important:
Missing the tax filing deadline can make your tax bill ballon to a number you don't even recognize. In 2023, the average estimated tax penalty jumped to $500 from $150 the previous year, according to IRS data as reported by the Wall Street Journal.
That's because the penalty for failing to make accurate, on-time payments – or not paying estimated taxes at all – surged to 8% at the beginning of October 2023, nearly triple the previous 3% rate.
Further, penalties for both failure to file and failure to pay reach as high as 25% of your unpaid assessed taxes.
Key Points:
We'll discuss the following five strategies to help you save on IRS penalties:
1. Pay as Much as You Can as Fast As you Can:
When you file your return, pay as much as you can, as soon as you can, even if you can’t pay the whole thing. Penalties are steep—5% per month for late filing and 0.5% per month for late payment. These penalties max out at 25% of your unpaid taxes, each, which means you could end up owing up to 50% more based on penalties alone.
The more you pay and the earlier you pay will make a huge difference.
2. File your tax return timely even if you can’t pay:
When you know you owe but can’t pay, the WORST thing to do is to NOT file the return which seems to be a common tactic used by taxpayers.
I kinda get it.
Why alert the IRS to a balance owed if you aren’t able to pay it? Notwithstanding, the reality is, by not filing the return, you’re hit with the failure to file penalty along with the failure to pay penalty both of which can add up to 25% of the total assessed tax balance for each.
File your return timely so you aren't penalized for not doing so and pay what you can.
3. Seek Penalty Relief with the First Time or Reasonable Cause Abatement:
If you haven’t had issues with the IRS including filing your return late or paying a balance late for the previous three years, you might qualify for First Time Penalty Abatement or “FTA”.
The first-time penalty abatement was created to reward taxpayers who generally file and pay on time but who had a one time slip up. Most people do not take advantage of it, mostly because they don’t know about it.
Alternatively, the IRS will consider abating penalties if you can prove that your failure to file or pay was due to reasonable cause.
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But not just any run of the mill situation qualifies.
The IRS provides a list of reasons that generally qualify:
On the other hand, the following circumstances DON’T generally qualify as valid reasons for reasonable cause abatement:
4. Set Up a Monthly Payment Plan:
Can't pay your full tax debt immediately?
We talked about the first thing you should do.
Pay as much as you can.
Then, at the very least, negotiate an installment agreement in which you pay a portion of your balance owed on a monthly basis.
Yes, interest and penalties will still accrue, but the failure-to-pay penalty is cut in half while you're on a payment plan.
5. Implement Long-term Tax Management Strategies:
If you receive a W-2 each year, avoid a balance owed at the end of the year by reviewing your tax withholding each year.
Take advantage of the IRS's Tax Withholding Estimator.
This simple tool can help you to make sure you’re withholding the correct amount.
TL;DR (Too Long; Didn't Read):
Missed the April tax deadline? Here's what to do:
When tax day comes around and you can’t pay what you owe, the last thing you want to do is dig your head in the sand which seems to be a go to move for many taxpayers.
It’s the worst thing you can do.
Instead take advantage of the strategies discussed above to save as much as you can in light of the situation.
PS: Have you checked to see whether you’re eligible for the First Time Abatement on any years for which you owe or owed the IRS?
Ever been approved for a Reasonable Cause penalty abatement?
Let us know in the comments.