IRS Tax Penalties: How to Avoid and Reduce Them

How to Avoid and Reduce IRS Tax Penalties

The Internal Revenue Service is not a department that anyone wants to deal with, especially when it comes to tax penalties. However, it’s essential to be aware of the different types of IRS tax penalties and what you can do to avoid or reduce them. This blog post will discuss the most common IRS tax penalties and what you can do to prevent them. We will also provide tips for minimizing any penalties that you may incur. Let’s get started.

What Are The Most Common Tax Penalties?

Tax penalties are fees the IRS levies on individuals who don’t pay their taxes, file late, or improperly report income. They can also be assessed by taxpayers who make “frivolous” claims about why they should not have to pay what is owed.


Things can sometimes be uncontrollable, and people may not have the money to pay their taxes on time. This can result in a penalty fee from the IRS. The most common tax penalties are:


  • Failure-to-file penalty

This fee is charged when you don’t file your return by the due date, including extensions. The failure-to-file penalty is usually much more than the failure-to-pay penalty, so it’s a good idea to file on time even if you can’t pay. It’s 0.5% of the unpaid taxes per month up to a maximum of 25%.


  • Failure-to-pay penalty 

This is charged when you don’t pay taxes by the due date or dates that apply to your return. It can happen if you don’t have the money to pay your taxes on time or if you disagree with the IRS about how much you owe. The IRS now offers taxpayers the ‘pay-as-you-go’ system, which allows you to pay your taxes as you earn income throughout the year.


You can pay quarterly to avoid having to pay a lump sum of money at once. If you cannot pay all your taxes before April 15th, you can request an extension from the IRS.


If your return is more than 60 days late, there will be a minimum penalty of $205 or 100% of the unpaid tax – whichever is smaller. The fine is 0.25% of the due taxes per month up to a maximum of 25%.


  • Frivolous tax return penalty 

This penalty is assessed against anyone who files an incorrect or incomplete tax form on purpose – also known as filing a “frivolous” return. It can be charged if you file a return for which you don’t have the required information or file a return to delay paying taxes. The penalty is $500 for each frivolous tax return filed.


  • Dishonored check penalty

This penalty is assessed if you mail a check to the IRS, but it’s returned due to insufficient funds. The fine is $30 for each check that’s returned. When your check bounces, the IRS will also charge you interest on the taxes initially paid with the bad check.

How Can I Avoid Or Reduce These Penalties?

There are many ways that taxpayers can avoid or reduce these penalties. Some common methods are listed below.


  • File on Time

One of the simplest ways to avoid a penalty is to file your taxes on time. If you file late, you will be charged a failure-to-file penalty. This penalty equals five percent of unpaid taxes for each month or part of a month that your return is late, up to a maximum of 25%.


  • Pay on Time

If you don’t pay your taxes by the due date, you will be charged a failure-to-pay penalty. The IRS charges four percent each month or part of a month that you owe for late payment, up to 22% in total. 


You cannot get this penalty if you have already filed your return but haven’t paid on time. In this case, the IRS will charge a failure-to-file penalty instead of a failure-to-pay penalty.


  • File an Extension

Filing for an extension can help you reduce the penalties you pay by giving you extra time to file your return. You should file Form 4868 to request an extension, which provides you with six additional months to file your taxes. 


This could reduce late filing penalties and interest charges that the IRS would have charged you if you hadn’t filed for an extension.


  • File Electronically

If you cannot file electronically because of a disability or other special circumstance, you can file a paper return. However, the IRS charges a higher penalty for paper returns than electronic returns. 


The failure-to-file penalty is ten percent of your unpaid taxes for each month or part of a month that your return is late, up to a maximum of 50%.


  • Use Direct Deposit

The IRS charges a lower penalty if you use direct deposit to pay your taxes. The failure-to-pay penalty is only 0.50% per month when you use direct deposit, compared to the four percent per month charged when you don’t use direct deposit.


  • Pay by Credit Card

If you can’t pay by direct deposit, you can also use a credit card to make your payment. The IRS charges the same 0.50% failure-to-pay penalty when you pay with a credit card as it does for direct deposit payments.

Can You Remove Tax Penalties?

One of the main concerns taxpayers have regarding taxes is the dreaded tax penalty. This can result from not filing your return on time, making an error on your return, or owing money you didn’t expect. The good news is that you can remove or reduce your tax penalties in many cases.


IRS might consider your claim with the following options:


Penalty Abatement: This is a request to remove or reduce a penalty because of special circumstances. You must show that you had a reasonable cause for not meeting the tax obligation and that you acted in good faith.


Innocent Spouse Relief: If your spouse was responsible for the error on your return, you might be able to get relief from the tax penalties.


Offer in Compromise: This is an agreement between you and the IRS that settles your debt for less than the total amount you owe. You must meet specific requirements, such as proving that you cannot pay what you owe.


Request for Penalty Relief: This option is available if you didn’t file your taxes on time and owe a penalty, but you did not receive any notice from the IRS.


First Time Abatement: This is an option for taxpayers who have previously paid penalties in the last three years and meet other criteria. You may be able to request relief from future liabilities through this program.


Reasonable Cause: If you could not file your taxes or pay them on time, you can appeal for reasonable cause. You must have a valid reason for not filing and paying as the law requires.

Taxpayer Advocate Service: The IRS has an independent organization that helps taxpayers experiencing financial hardship or other issues with the IRS. You can contact this service for help with your tax penalties.

Final Words

Filing and paying your taxes on time is best to avoid IRS tax penalties. If you cannot file on time, request an extension from the IRS so that you have more time to complete your return and pay any taxes owed. That way, you can avoid or reduce any penalties that may apply. For more help, contact the IRS or a qualified tax professional.


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