You may have heard from financial advisers about hiring a tax attorney and planning your taxes beforehand by opting for tax preparation services. Have you ever wondered why?
The answer is simple: safeguard yourself from IRS penalties and save money on your taxes.
Taxes are pay-as-you-go. This means that rather than waiting until the end of the year to pay your taxes, you should do it as you earn money during the year. These are known as expected taxes. You may either have taxes withheld from your paycheck by your employer or make quarterly tax payments on your own. Quarterly payments may be required if you have income that is not subject to withholding. Earnings from freelance work and other sources, as well as interest, dividends, rewards, and rental payments, are included here. The money you earn through side gigs or other self-employed endeavors may count, too. In all these scenarios, and many more to come, paying estimated tax on time becomes essential. If you don’t pay enough estimated tax, the IRS may penalize you by increasing your annual tax bill or may charge penalties. Hence, it is better to be informed!
This article will explain all the essential details about IRS penalties and, most importantly, how to avoid underpayment of estimated tax penalties.
Types of IRS penalties!
Before avoiding IRS tax penalties, we should understand the types levied by the IRS and plan activities according to them. There are over ten types of IRS tax penalties.
- Failure to file: In this situation, taxpayers fail to submit their tax returns by the specified deadline.
- Failure to deposit: If your business fails to make timely and correct deposits of payroll taxes, you have committed a failure to deposit.
- Information return: If you are late filing information returns or providing payee statements, you may be subject to this penalty.
- Failure to pay: When you don’t pay the tax you owe by the due date, you may be levied with a failure to pay liability.
- Dishonored Checks: When a bank refuses to accept a customer’s check or another form of payment, this is known as a “dishonored check.”
- Accuracy-Related: When you fail to report all of your income or claim an incorrect deduction or credit for which you do not qualify, you may incur an Accuracy-Related Penalty.
- Tax Preparer Penalties: When tax preparers violate the law, they are subjected to this penalty. (Tax preparer: people who calculate and file taxes on behalf of enterprises and individuals.)
PS: Don’t confuse tax preparers with tax attorneys. Tax attorneys are lawyers who are experts in all things legal related to tax preparation, having passed the bar test for their state. Whereas a tax preparer doesn’t need a graduate degree to get licensed. But, they do need to demonstrate competency by testing or experience working with the IRS.
- Underpayment of Estimated Tax by Corporations: When corporate income tax is not paid on time or in the correct amount.
- International Information Reporting: Taxpayers who fail to declare income or gains from overseas sources on time are subject to penalties under the International Information Reporting Act.
- Underpayment of Estimated Tax by Individuals: If you are an individual and you fail to pay your estimated tax on time or in full, you will be subject to penalties and interest.
How do you know you have a tax penalty?
If you have a tax penalty, you will receive a letter or notice from the IRS informing you of your type of penalty, the reason, and the next steps. With this, you can hire a tax attorney to help you resolve these penalties seamlessly. Lastly, if you feel there has been a mistake, then the tax attorneys can dispute your case and save you trouble in the long run.
How do you avoid tax penalties in the first place?
The income tax penalty may be avoided in certain circumstances.
- No penalty is applied if the underpayment is smaller than the de-minimis threshold. The bare minimum is $1000. This means that the IRS tax penalty will not apply if your tax liability is less than $1,000.
- Moreover, the penalty can be avoided if the individual or enterprise pays the whole amount of tax owed from the prior year’s return, or at least 90% of the tax owed for the current year.
If you are running your own business or have a side hustle with your full-time job, stay one step ahead. Plan your finances in advance via tax preparation services. With these services, you can file correct tax forms, make timely tax payments, and provide any required information returns, which will save you from incurring penalties. Moreover, you can understand your finances better and will be able to save on taxes in the long run.
The overriding lesson here is to don’t wait. If you know there will be a significant change in the amount of income you derive over the next year, don’t sit on your hands waiting for too long. If you have missed the deadline or cannot pay your taxes, then get in touch with your BestTaxPro. With our help, you can opt for an extension and payment plan that can help you to get your issues resolved. Ultimately, We have your back! If you are being audited or charged a wrong penalty, our team of Former IRS Agents & Tax Experts will be able to provide enough documentation so you can avoid or at least mitigate any penalty fees or financial pain due to non-compliance.