Paying taxes might be an inevitable fate, but paying penalties need not be. Unfortunately, many people end up paying more than their dues in taxes because of penalties. It takes a lot of planning, keenness, and knowledge of tax laws to avoid paying unnecessary penalties. Well, if you don’t want to pay more money in taxes than you should, read on to find out common IRS penalties and how you can avoid making them.
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Late Filing Penalties
The most common tax penalty by far is the late filing penalty. It is easy to see why people are often late in filing their taxes. For one, few people look forward to calculating their taxes. Secondly, no one likes parting with their money to give to the state. Finally, some people don’t know when taxes are due, which means that they fail to meet the deadline and consequently pay penalties for filing late.
The IRS guidelines dictate that you must file your taxes by the 15th of April every year. If this day falls on a weekend or holiday, then the returns are due the next business day. This is such an important date that you should consider marking it on your calendar, especially if you have suffered a lateness penalty in the past.
If you cannot file your returns by this date, consider requesting an extension in good time. However, be sure that your reason for requesting an extension satisfies the IRS guidelines.
Also, be sure to sign the tax return slip. If you don’t, it will be as if you never filed taxes in the first place, and you will still pay the lateness penalty.
The typical penalty for filing taxes late is 25% of your taxes. Rather than pay this hefty fine, why not purposely pay your taxes in good time?
When it comes to filing taxes, accuracy matters more than you might think. The IRS imposes a penalty for inaccuracy more often than most people assume.
Usually, the agency’s employees will get a sense of inaccurate filing if you become too creative with your bookkeeping. This is particularly true where you claim deductions, say for repairs or business expenses. Whenever you do incur such expenses, keep accurate records. Have receipts and know the details about the expense in case the IRS ever comes calling.
The penalty for inaccuracy is a whopping 25% of your taxes, plus the interest accrued for the period you didn’t pay the correct taxes.
Inaccuracy penalties do not only apply to dishonest claims; even seemingly innocuous errors will get you in trouble with the IRS. If you make math errors while calculating your taxes, they still count as inaccuracies, and you will pay a fine for them.
To avoid this predicament, consider hiring a tax accountant. Sure, it might cost you some money, but the benefits of having a reliable and experienced tax accountant surpass the fee you have to pay.
Withdrawing Money from Tax-Advantaged Retirement Accounts Early
Everyone agrees that saving for retirement is an excellent thing to do. Even the government encourages citizens to keep some money for their later years by making retirement accounts tax-favored.
But there is a catch. You are only entitled to withdraw money from your IRA and 401K account tax-free when you turn 59 and ½ years old. If you withdraw any earlier than that, you must remit 10% of that money to the IRS as a penalty.
However, some circumstances warrant withdrawing money from a retirement account tax-free before you reach retirement age. For instance, first-time homebuyers can use some of the money in their retirement accounts without paying taxes.
You can also withdraw money for medical expenses without incurring any penalties. Additionally, you may be entitled to withdraw cash from a retirement account early if you lose your job and don’t have medical insurance.
As you can see, tax law waters are murky thanks to the long list of rules and their exceptions. It is best to rely on a tax accountant or attorney’s wisdom to ensure that you don’t get into trouble with the IRS.
Charitable Donations Penalties
It is common knowledge that giving money to charity can lower your taxes. But that is not all there is to this rule. For one, you must ensure that the organization you are donating to qualifies as a charitable organization as per the IRS guidelines. Then, your donation also needs to satisfy the IRS definition of a charitable donation if you are to make a deduction claim on it.
When you donate, the organization should give you an itemized list of the donated things and their condition. You should also indicate the value of those items on the slip. If you don’t, you can’t successfully claim a tax rebate from the IRS.
Not only that, but you may also face the 25% inaccuracy penalty, plus the interest accrued. This can add up to a lot of money, and you may find yourself needing IRS payment plans to cover these hefty fines.
Unqualified Withdrawals from HSAs and 529 Plans
Like retirement accounts, Health Savings Accounts (HSAs) and 529 plans are tax-advantaged accounts. This means that as long as you use the money you have saved in these accounts for its designated purpose, you will not have to pay taxes. Conversely, using this money for unintended purposes will attract taxes and penalties without fail.
For a HAS account, you are only allowed to use the money for medical purposes only. If you use it for unrelated expenses, you will pay a 20% penalty of the withdrawn amount and will also have to report it as income.
529 plans are supposed to fund educational expenses, regardless of the level of education. In addition to paying for tuition, you can also use the money in these accounts to pay for books and other resources needed in school. However, using the cash for other purposes, you will pay a 10% penalty and declare the withdrawn amount as income.