Is There a Penalty for Overpaying Taxes?

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There are penalties for almost everything in the IRS's complicated tax regulatory guidelines, so it's no surprise that some people believe there is a penalty for overpaying taxes. Fortunately, overpayment of tax is the one area where taxpayers are allowed to err. Upon inspection, it's easy to understand why this particular mistake is tolerated.

Criteria

  • Penalties are levied to encourage voluntary compliance from taxpayers. All IRS penalties relate to an infraction whereby a taxpayer failed to adhere to IRS guidelines. Although technically, overpaying is not adhering to IRS guidelines in the sense that you paid more than you owe instead of the exact amount, it still does not lead to a penalty assessment. The biggest reason for this is that over-payments benefit the government. Overpaying your tax is akin to giving an interest-free loan to the IRS.

Prevention

  • If you overpaid your tax during the year, you can help prevent this from happening again in the future by using the IRS online withholding calculator. The calculator will prompt you to answer a series of questions about your tax situation and then use that information to determine your federal withholding amount. If you make estimated tax payments, use form 1040-ES to determine your correct estimated tax payment amount.

Method

  • Penalties can be assessed in a specific dollar amount or as a percentage of any unpaid tax owed. For instance, the failure to file penalty is 5 percent of any unpaid tax while the failure to pay penalty is 0.5 percent of any tax owed. However, for some infractions --such as dishonored checks -- the IRS charges one flat fee up to a certain point. Dishonored check penalties are $25 if the taxpayer's check was less than $1,250 and 2 percent of the dishonored check if the amount was in excess of $1,250.

Remedies

  • If you overpay your tax, you will get the money back in the form of a refund. If you have a balance due and you overpay the balance due, the IRS will automatically forward the excess amount back to you. For instance, if at tax time you discover that you owe $500 and you mail that amount to the IRS, only to receive a letter from the IRS alerting you that you made an error on your return and you only owe $300, the IRS will automatically send you the $200 difference.

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