How to Avoid Tax Penalty
A tax penalty can increase the amount of money owed to the IRS and create a significant financial burden on a taxpayer. The type of tax penalty charged can very depending on what the taxpayer did wrong. Unfortunately, unfamiliarity with the tax code and laws is not an adequate defense. Therefore, it's important to follow proper tax procedure and file taxes in a timely fashion.
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Things You'll Need
- Access to the internet or tax prepartion software.
- IRS forms such as 4868 - Application for Automatic Extension of Time To File U.S. Income Tax Return
Instructions
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How to Avoid a Tax Penalty
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File your income taxes on time. Your taxes for the previous year need to be filed on or before April 15 of the following year. For example, your 2010 tax returns needs to be filed on or before April 15, 2011. Filing a timely tax return will save you from incurring a late fee penalty.
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File for an extension using IRS Form 4868. This form will automatically allow a taxpayer an extra four months to file taxes. However, even if you file the extension you must pay your taxes to the IRS on or before April 15. Estimate as closely as you can. If you are deficient by more than 10 percent you will be charged a penalty as if you never filed for an extension.
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Avoid negligence penalties. These apply if you are audited by the IRS and are found to have underpaid your taxes. Negligence is defined as any disregard for the tax code or rules, whether intentional, reckless or careless. The amount of the penalty equals 5 percent of the amount of taxes not paid. Make sure you file the correct amount the first time.
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Avoid fraud penalties. If the IRS determines that you underpaid your taxes by intentionally disregarding the tax rules, you will face a fraud penalty. The fraud penalty is equal to 75 percent of the amount underpaid. This penalty will take the place of other incurred penalties. So if you have face negligence, late-payment and fraud penalties, only the fraud penalty will apply. Make sure you honestly file your taxes in order to avoid this penalty.
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Avoid a failure to make estimated tax payments penalty. Each taxpayer is responsible for paying taxes throughout the year. This can be done through employer withholding, where your employer holds back part of your salary each pay cycle and forwards it to the IRS, or through estimated payments you pay quarterly to the IRS. If you are self-employed, you probably need to make estimated payments. The total of your quarterly payments should equal at least 90 percent of the amount owed on April 15. If you have a deficient, the IRS will charge you a penalty equal to the interest that would have accrued during the time of underpayment. Be sure your withholding or quarterly estimated payments equal at least 90 percent of your federal income taxes to avoid this penalty.
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Tips & Warnings
If you are confused about your tax situation, speak to a tax attorney or an accountant. Purchasing tax preparation software, such as TurboTax, can help speed up the process of filing taxes, give you ready access to necessary forms, help you determine estimated payments and find useful deductions. Forms can also be found online at: http://www.irs.gov/formspubs/index.html
The IRS can garnish wages and put liens on taxpayers' property for failure to pay. If you have problems paying, communicate with the IRS. The agecny will work with you to ensure that you do not suffer an economic hardship.
