A Dozen IRS Not so Fine Penalties

iStock_000011178751XSmallOver the past few years the IRS has made the use of penalties and fines a more prevalent tool to encourage compliance among taxpayers.

This “stick” approach is in direct contrast to the “voluntary” philosophy built within our tax system.

Here are a dozen of the more common penalties and fees.

Icon S-Corporation and Partnership late filing fee. This $195 fine is due for any month or partial month you are late in filing this tax return. The fine is due even though no tax is usually owed on these flow-through tax returns.
Icon 1099 or W-2 late filing penalty. You are required to issue a 1099 for any vendor that has $600 or more of activity with your business. The filing due date is the end of February or the end of March if e-filed.
Icon Underpayment of tax. This penalty is applied when a taxpayer does not withhold enough of their pay to cover their tax liability. There is a safe harbor calculation that protects you from this penalty. The safe harbor is usually withholding enough to cover 100% of last year’s tax liability or 90% of the current year’s tax liability. Special rules apply for higher income taxpayers.
Icon Late filing fee for form 1040. The fine is 5% of the unpaid tax per month (or fraction of a month) up to 25%. If over 60 days past due, the penalty is the smaller of $135 or 100% of the unpaid tax.
Icon Failure to file correct information returns. Fine: $50 – $260 per form (usually Form 1099s)
Icon Failure to file a tax return.
Icon Failure to have adequate health insurance for the entire year.
Icon 25% Inaccuracy penalty. This penalty applies to things like inaccurate business mileage deductions for the self-employed or to non-cash contributions that have no documentation. The best defense is to keep an accurate mileage log and record of your donations.
Icon Failure to file foreign information returns. If you own property in a foreign country you must consider the need to file annual reporting to the IRS. The rules in this area are strict and the fines can be high as the IRS continues to crack down on the use of foreign accounts to avoid paying U.S. taxes.
Icon Potential 100% penalty for employer failure to pay withholding taxes. The IRS takes a strong stance on employers that fail to send in their employee’s Social Security, Medicare and Federal tax withholdings.
Icon Retirement Account Penalties. There is a 10% penalty for withdrawing funds from qualified retirement accounts like IRA’s and 401(k)s prior to age 59½. There is also a 6% penalty tax for excess contributions to any of these accounts until the excess amount is corrected.
Icon Fine for not taking Annual Minimum Distribution (AMD) from retirement Accounts. If you are age 70½ or older you must withdraw a minimum amount from your qualified retirement accounts each year. Failure to do so creates a potentially large penalty of 50% of the amount that should have been withdrawn.

Hopefully, by being aware of these common IRS penalties you can make sure they never apply to you or anyone you know. Sometimes when faced with these penalties you can request an abatement of the fine if you are a first-time offender.