Owing the IRS doesn’t just stop with your tax balance. If your tax obligations are not met, you could face penalties that can make your debt even more unmanageable. Understanding common IRS penalties and how to avoid them is essential for taxpayers to stay on the right side of the law and minimize financial consequences. Here are some of the most common IRS penalties and how to avoid (or reduce) them.
Failure to File
One of the most common penalties imposed by the IRS is the failure to file penalty. If you don’t file by the tax deadline, or the requested extension deadline, and you owe taxes, you will be charged with a failure to file penalty. This penalty is 5% of your unpaid tax for every month or partial month that your return is late. Like the Failure to Pay penalty, it caps out at 25% of your balance. To avoid this penalty, it’s crucial to file your tax return on time, even if you are unable to pay the full amount owed. Filing for an extension can also help avoid this penalty, but it’s important to remember that an extension to file is not an extension to pay any taxes owed. The deadline to file your 2023 tax return is April 15, 2024.
Failure to Pay
In addition to the failure to file penalty, the IRS also imposes a failure to pay penalty for taxpayers who do not pay their taxes by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax is not paid. However, it will not exceed 25% of your unpaid taxes. There are some scenarios in which this penalty can increase or decrease. One example is if the IRS sends a notice with an intent to levy. In this case, you have 10 days to pay your taxes. If you do not, the Failure to Pay penalty increases to 1% per month or partial month. However, if you set up a payment plan, the penalty is reduced to 0.25% per month or partial month.
Underpayment of Estimated Tax
If you don’t withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don’t pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th and January 15th of the next year. The penalty can change quarterly. As of Q1 of 2024, individuals are charged 8% on underpaid tax while large corporations are charged 10%. You can avoid this penalty by meeting one of two requirements:
Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding
Pay 100% of last year’s tax bill, before withholding or tax credits. If you have an AGI of more than $150,000, you should pay 110%.
Accuracy-Related Penalties
Taxpayers who file inaccurate tax returns may be subject to accuracy-related penalties. Common reasons for receiving this penalty are if you don’t report all your income or if you claim deductions or credits you don’t qualify for. The two types of this penalty are:
Negligence or Disregard of the Rules of Regulations Penalty: This penalty is common among those who do not follow tax laws or are careless when preparing their return. Examples include not reporting all income or not checking tax deductions that result in a refund that seems too good to be true.
Substantial Understatement of Income Tax Penalty: This penalty is given to those who understate their tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.
Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income. Avoiding this penalty is rather simple. Taxpayers should ensure that their tax returns are accurate and complete. Furthermore, they should maintain documentation to support their income, deductions, and credits claimed.
IRS Penalty Abatement
Penalties imposed by the IRS can significantly increase the amount owed by taxpayers and can be financially burdensome. However, under certain circumstances, taxpayers may be eligible to have these penalties reduced or eliminated entirely through penalty abatement. Taxpayers may request penalty abatement for reasons such as reasonable cause, statutory exceptions, or administrative waivers.
Reasonable Cause: One common reason for requesting penalty abatement is demonstrating “reasonable cause.” This means showing that there was a valid reason beyond the taxpayer’s control that prevented them from complying with tax obligations. Examples of reasonable cause may include serious illness, natural disasters, or death in the family, among others. Taxpayers must provide documentation or evidence to support their claim of reasonable cause.
Statutory Exceptions: Some penalties may have statutory exceptions that allow for penalty relief under specific circumstances. For example, certain penalties may be waived if the taxpayer can demonstrate that they acted in good faith or relied on incorrect advice from the IRS.
Administrative Waivers: In some cases, the IRS may offer administrative waivers for certain penalties. These waivers are typically granted on a case-by-case basis and may be available for first-time offenders or taxpayers who have a history of compliance with tax laws.
Penalty relief may be requested via phone or by mailing Form 843, Claim for Refund and Request for Abatement. If the IRS denies your request, you may be able to appeal the decision.
Get Help Avoiding and Reducing IRS Penalties
Remember, the IRS charges interest on penalties and interest will continue to increase your balance until it’s paid in full. Since interest on underpayments begin on the tax due date, it’s important to act as quickly as possible to resolve your tax issue. If you can pay your balance in full, you should do so immediately. If you cannot afford to, you should look into options including payment plans or tax relief. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
If you spent time unemployed last year, you might be wondering how that’ll affect your tax return this year, especially if it was your first time ever being without work. When it comes to unemployment and taxes, you might have some questions. Here’s a breakdown of how unemployment affects your taxes.
Is Unemployment Taxable?
Perhaps the first question people ask about unemployment is: “Is my unemployment income taxable?” In short, it is taxable. The IRS requires you to report any unemployment income on your federal tax return with Form 1099-G, Certain Government Payments. Most states tax unemployment income as well, except for the few that don’t tax any income and the few that exempt unemployment benefits from income taxes. You can check with your state’s Department of revenue to see if your income is taxed at the state level.
How Do I Pay Unemployment Taxes?
When applying for unemployment benefits, you can request your state to withhold federal taxes from your checks. In this case, 10% will be used to pay federal taxes. You can also make estimated quarterly tax payments throughout the year. If you go this route, be mindful of the deadlines for each quarter: April 15, June 15, September 15, and January 15 of the following year. Your final option is to just pay all taxes due during tax time. The same three options usually also apply to paying taxes at the state level.
Does Unemployment Affect My Tax Credits?
Receiving unemployment benefits might affect your eligibility for certain tax credits. For example, eligibility of the earned income tax credit (EITC) and the child tax credit (CTC) are determined by earned income. Since unemployment benefits are not considered earned income, it could reduce your credit amount or completely disqualify your eligibility. Since the EITC is worth up to $7,430 and the CTC is worth $2,000 per qualifying child in 2024, it is best to check with your tax preparer to see exactly how unemployment will affect your eligibility for tax credits you rely on each year.
Are Other Government Benefits Taxable?
Sometimes the unemployed seek other financial assistance from the government, including housing subsidies, childcare subsidies, and SNAP benefits. You might also accept food donations from food pantries. These benefits are generally not taxable, but you should check with your local benefits offices to confirm.
What If I Can’t Pay My Taxes?
Being unemployed might mean you’re low on funds and might need extra help if you run into issues during tax time. The IRS offers a free tax filing service on their website and Volunteer Income Tax Assistance (VITA) provides free tax preparation for lower-income taxpayers. If your tax issues are bigger or more complex, it might be best to consider tax relief options. Our team of qualified and dedicated tax professionals can help if you have tax debt. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
When considering investing, you may first daydream of the potential rewards of the risky endeavor. But as a new investor, it can be overwhelming to navigate the world of taxes. However, understanding the basics of taxation can help you make informed decisions and avoid costly mistakes during tax time. In this brief tax guide for new investors, we will cover some of the essential things you need to know.
Capital Gains vs. Ordinary Income
When you invest, you have the potential to earn income through two methods: capital gains and ordinary income. Capital gains are the profits you make when you sell an asset for more than you paid for it. Ordinary income is income earned through wages, salaries, interest, dividends, and other sources.
The tax rate for capital gains is generally lower than the tax rate for ordinary income. The tax rate you pay on capital gains depends on how long you hold the asset before selling it. If you hold it for more than a year, it’s considered a long-term capital gain. In this case, the tax rate will be lower than if you hold it for less than a year, otherwise known as a short-term capital gain. Short-term capital gains are taxed as ordinary income. In 2023, the tax rates for long-term capital gains are as follows:
Filing Status
0%
15%
20%
Single
Up to $44,625
$44,626 to $492,300
Over $492,300
Head of Household
Up to $59,750
$59,751 to $523,050
Over $523,050
Married Filing Jointly orQualified Widow(er)
Up to $89,250
$89,251 to $553,850
Over $553,850
Married Filing Separately
Up to $44,625
$44,626 to $276,900
Over $276,900
The long-term capital gains tax rates for 2024 are:
Filing Status
0%
15%
20%
Single
Up to $47,025
$47,026 to $518,900
Over $518,900
Head of Household
Up to $63,000
$63,001 to $551,350
Over $551,350
Married Filing Jointly orQualified Widow(er)
Up to $94,050
$94,051 to $583,750
Over $583,750
Married Filing Separately
Up to $47,025
$47,026 to $291,850
Over $291,850
Tax Implications of Different Types of Investments
Different types of investments are taxed differently. For example, stocks are taxed on capital gains and dividends, while bonds are taxed on interest income. Real estate is also subject to specific tax rules, including depreciation deductions and the potential for tax-deferred exchanges.
It’s important to understand the tax implications of your investments before you invest. For example, if you’re investing in a high-yield bond, you may be subject to higher taxes on the interest income than if you were investing in a low-yield bond. By understanding the tax implications, you can make informed decisions about where to invest your money. Consulting with a financial advisor before making these financial moves can help you make the most informed decision now and prepare for any tax bill later.
Investment Expenses
Investment expenses can be deducted from your taxes, which reduces your taxable income. These expenses can include brokerage fees, investment advisory fees, and other costs related to your investments. It’s important to keep track of these expenses throughout the year, so you can deduct them on your tax return. Be sure to have proper documentation just in case the IRS requests substantiation later.
Selling Investments
Knowing when to sell your investments can have a significant impact on your taxes. If you sell an asset for a loss, you can use that loss to offset capital gains from other investments. This is called tax-loss harvesting and can help reduce your tax bill. Tax-loss harvesting could also help reduce your ordinary income tax liability, even if you don’t have any capital gains to offset. To do this, you would sell a stock at a loss and then purchase a similar stock with the proceeds.
Tax-Advantaged Accounts
Tax-advantaged accounts are investment accounts that offer tax benefits. These accounts include 401(k)s, IRAs, and 529 college savings plans. Contributions to these accounts are tax-deductible, and the investment interest grows tax-free. When you withdraw the money during retirement or for qualified education expenses, you’ll pay taxes on the withdrawals, but typically at a lower tax rate than during your working years. Investing in tax-advantaged accounts can be an effective way to reduce your tax bill and grow your investments over time.
In conclusion, understanding taxes is an essential part of investing. By knowing the tax implications of your investments, keeping track of your investment expenses, and taking advantage of tax-advantaged accounts, you can reduce your tax bill and maximize your investment returns. Remember to consult with a tax professional for personalized advice on your specific situation.
Tax Help for New Investors
Remember, the most important thing you can do during tax time is ensure that you are reporting all income, whether it is ordinary income, interest earned on a bond, or dividends paid out to you that year. Failing to report income during tax time can put you on a fast path to being audited by the IRS. If you need help with a large tax liability because you were unprepared for the tax implications of investments, a knowledgeable and experienced tax professional can assist. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Navigating the complexities of taxes can be challenging for anyone. When it comes to families with children, there are additional considerations to be aware of. One such consideration is the IRS Kiddie Tax. This set of rules is specifically aimed at taxing unearned income of certain children at their parent’s tax rate. Understanding how the Kiddie Tax works is crucial for parents to effectively manage their tax liabilities. Let’s delve deeper into what the Kiddie Tax entails and how it might affect your family’s tax situation.
What is the Kiddie Tax?
The Kiddie Tax is a tax provision established by the IRS aimed at preventing parents from shifting investment income to their children to take advantage of their lower tax rates. Specifically, it applies to children who have unearned income above a certain threshold. It applies to children under 19 years of age or under 24 if they are full-time students. Unearned income includes interest, dividends, capital gains, rents, and royalties, among other types of passive income. However, other common examples include taxable scholarships and income produced by gifts from family.
Exemptions
The Kiddie Tax does not apply to all children. If a child meets any of these criteria, they will be exempt from the Kiddie Tax rules.
The child has no living parents at the end of the tax year.
The child got married and filed a joint return for the tax year.
The child is not required to file a tax return for the tax year.
The first $1,250 of a child’s unearned income is not taxed. However, the next $1,250 is subject to the child’s tax rate of 10%. Additionally, any income that exceeds $2,500 is taxed at the greater rate of the child’s tax rate or the parent or guardian’s tax rate. For example, if a child had $3,000 in unearned income, $500 would be subject to the Kiddie Tax. Finally, the threshold will rise to $2,600 for tax year 2024.
For 2023, the standard deduction for a child is the greater of $1,250 or the child’s earned income plus $400, if you can claim them as a dependent. This is because $1,250 is the standard deduction for dependents. If you cannot claim the child as a dependent, they’d generally use the standard deduction of a single filer. This figure is $13,850 for 2023.
Examples
Emily receives $3,000 in dividend income from stocks held in a custodial account in her name. Her parents’ marginal tax rate is 24%. Under the Kiddie Tax rules, since Emily’s unearned income exceeds the $2,500 threshold, the portion exceeding the threshold ($500) will be taxed at her parents’ tax rate.
Consider a family with two children, Jack and Lily. Jack is 17 years old and earns $1,800 in interest income from savings bonds. Lily, on the other hand, is 20 and a full-time college student She receives $3,500 in dividends from investments. Jack’s income will be taxed at his individual tax rate of 10%. However, Lily’s income will be subject to the Kiddie Tax at her parents’ tax rates.
17-year-old Michael is legally emancipated from his parents. He earns $5,000 in interest income from a savings account in his name. Since Michael is emancipated, the Kiddie Tax does not apply to him. Therefore, his interest income will be taxed at his individual tax rate.
Sarah, who is 18 years old, has a disability that meets certain criteria outlined by the IRS. Sarah receives $4,000 in dividends from investments. If Sarah’s disability qualifies her for an exception to the Kiddie Tax, her dividends may be taxed at her individual tax rate rather than at trust and estate tax rates.
How to Report Kiddie Tax
Reporting the Kiddie Tax on your tax return involves several steps. That said, it’s crucial to ensure accurate reporting to comply with the IRS. Calculate the child’s unearned income for the tax year. Remember, unearned income includes interest, dividends, capital gains, rents, and royalties, among other types of passive income. If the child’s unearned income exceeds the threshold, apply the Kiddie Tax rates to the portion of income exceeding the threshold. For 2023, unearned income up to $2,500 is taxed at the child’s rate. Any amount over $2,500 is taxed at the parent or guardian’s tax rate. This can be significantly higher than individual tax rates.
If the Kiddie Tax applies, use IRS Form 8615, Tax for Certain Children Who Have Unearned Income. This form helps determine the portion of the child’s unearned income subject to the Kiddie Tax. It also calculates the tax liability at the appropriate tax rate. Parents should attach this form to the child’s Form 1040. In some cases, the parent can include the child’s income on their return instead. They would do this with Form 8814, Parent’s Election to Report Child’s Interest and Dividends.
Tax Help for Parents
Understanding the Kiddie Tax is essential for parents who engage in financial planning strategies involving their children’s investments. While the Kiddie Tax aims to prevent tax avoidance, it can significantly impact the tax implications of certain investment decisions. Parents should consider consulting with a tax advisor or financial planner to develop tax-efficient strategies that align with their overall financial goals. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Discovering that you owe back taxes to the IRS can be a stressful and overwhelming experience. Whether due to oversight, financial hardship, or other circumstances, it’s essential to address this issue promptly and accurately. However, determining the exact amount of back taxes owed can be complex. In this article, we’ll outline steps and resources to help you navigate the process of finding out how much you owe the IRS in back taxes.
View Your IRS Online Account
The IRS offers taxpayers access to their own IRS online account where they can view information related to their tax obligations. One of the key things you can access here is your tax balance. If you haven’t already done so, you can visit the IRS website and create an account. You’ll need to provide personal information to verify your identity and create login credentials. While the actual process of creating an IRS online account might seem tedious, the IRS takes extra precautions to safeguard your identity.
Upon logging in, you’ll see the total amount owed and balance details. Here, you should be able to see the total amount you owe the IRS, including any penalties and interest that may have accrued. Your balance is broken down by tax year for added convenience. Depending on your tax situation and the amount owed, the IRS online account portal may also provide information about payment options. This could include setting up a payment plan, making a one-time payment, or exploring other payment arrangements.
Call the IRS
The IRS has dedicated phone lines and representatives available to assist taxpayers with inquiries about their tax accounts, including outstanding tax liabilities. Before calling the IRS, gather any relevant documents, such as tax returns, notices, or correspondence from the IRS. Having this information on hand will help the representative accurately assess your tax situation. If you’re calling on behalf of someone else, you’ll need authorization to discuss their account plus their personal information.
IRS phone wait times can be long, especially during tax time. It’s recommended to contact the IRS via your online account if possible. The IRS can be reached via telephone Monday through Friday from 7am to 7pm local time. Residents of Alaska and Hawaii should follow Pacific time. Residents of Puerto Rico may call from 8am to 8pm local time. Here are the phone numbers:
Individuals: 800-829-1040
Businesses: 800-829-4933
There are also a few phone lines with their own specific hours.
Non-Profits: 877-829-5500 from 8am to 5pm local time
Estates and Gift Taxes: 866-699-4083 from 10am to 2pm Eastern time
Excise Taxes: 866-699-4096 from 8am to 6pm Eastern time
Hearing Impaired: TTY/TDD 800-829-4059
Tax Help for Those Who Owe
Once you’ve determined the amount of back taxes owed, it’s crucial to develop a plan to address your tax debt and prevent further penalties and interest accrual. Depending on your financial situation, you may consider setting up an installment agreement, making an offer in compromise, or exploring other options available through the IRS. For individuals with complex tax situations or those who need assistance navigating the process of resolving back taxes, hiring a tax professional may be beneficial. Tax professionals, such as enrolled agents or tax attorneys, can provide personalized guidance, negotiate with the IRS on your behalf, and help develop a plan to address your tax debt effectively. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
