If you’re like me you’re just now starting to feel the pressure from the taxman looming overhead. My documents are due to the accountants today. So far I’ve gotten to the pulled-the-folder-out-of-the-cabinet stage. I look forward to a taxing evening. (Sorry, couldn’t help myself.)
But I will meet my deadline. Why? Because if I don’t, I’ll get hit with a penalty. The IRS imposes all kinds of penalties that run all the way from a simple monetary fine all the way up to imprisonment for criminal tax evasion. Here’s how to stay penalty free.
1. File Your Return and Pay Your Taxes on Time
This is a simple one. However, late filing and late payment penalties are the most common penalties levied by the IRS. If you file your return more than 60 days after the due date, the minimum penalty is $100 or 100% percent of the tax, whichever is less. Failure-to-pay penalties start at .5% of your unpaid taxes per month. This rate continues to increase to 1% per month once the IRS demands payment.
You’ll escape the late filing and late payment penalties if you if you pay at least 90% of your actual tax liability by the due date.
2. Have Enough Withheld From Your Check
When employees have taxes withheld from their paychecks, that money is remitted to the IRS to cover income tax and other taxes. If you don’t have enough withheld, you may be penalized. If you work for yourself, you need to make sure your are making the appropriate estimated payments to cover all taxes associated with self-employment.
3. Report All Your Income
If you understate the amount of income you made or overstate your allowable deductions, it’s going to result in a lower tax liability. If this understatement is 10% of the correct tax or $5,000, whichever is larger, you will be subject to understatement penalties. For corporations, the threshhold is 10% percent or $10,000,000, whichever is less.
4. Get Organized
Not understanding a complicated tax rule is one thing. Conveniently losing all your records is quite another. The IRS expects you to ‘make a reasonable attempt to comply with the internal revenue laws’ and to ‘exercise ordinary and reasonable care in preparation of a tax return’. This means keeping adequate and records.
5. Don’t Be a Con Man
Some of the world’s best bookkeepers are criminals. It’s easy to avoid this one: tell the truth. Fraud on a tax return can result in a penalty of 75% percent of the underpayment due to the fraud. So if you think you’re saving $1,000 by making up some bogus deductions, you might be surprised when your tax bill grows not by that $1,000, but by $1,750. Not a good use of your time and energy.
I hope this helps you understand that it’s actually pretty easy to stay out of trouble with the IRS as long as you tell the truth. With that knowledge, now you can focus on getting those forms in on time!