Mistakes in filing and paying taxes happen often, but understanding tax penalties helps you stay compliant and avoid unnecessary costs. Here’s what you need to know.
What Is a Tax Penalty?
The IRS imposes penalties when you miss deadlines, underpay taxes, or submit a payment that bounces. Even if you’re owed a refund, failing to meet requirements can still result in a penalty.
The IRS calculates penalties based on your unpaid taxes, the duration of underpayment, and the interest rate for underpayments, which changes quarterly. Staying proactive and informed helps you minimize penalties and maintain compliance.
Types of Tax Penalties
1. Failure to File
Failing to file your tax return by the due date triggers this penalty.
- Penalty: You pay 5% of unpaid taxes for each month (or part thereof) the return is late, up to 25%. Filing more than 60 days late incurs a minimum penalty of $485 or 100% of unpaid taxes, whichever is less.
- Avoid It: File on time or request an extension. If owed a refund, filing late won’t incur a penalty, but you must file within three years to claim it.
2. Failure to Pay
This penalty applies when you don’t pay your taxes in full by the due date.
- Penalty: The IRS charges 0.5% of unpaid taxes for every month (or part thereof) they remain unpaid, up to 25%. If both failure-to-file and failure-to-pay penalties apply, the combined penalty maxes out at 5% per month.
- Avoid It: Pay as much as you can by the due date. If you can’t pay in full, set up a payment plan with the IRS.
3. Failure to Pay Estimated Taxes
If you earn income without tax withholding, such as from self-employment, the IRS expects quarterly estimated tax payments.
- Penalty: You’ll face this penalty if you owe more than $1,000 after subtracting withholdings and credits.
- Quarterly Deadlines in 2025:
- April 15
- June 17
- September 16
- January 15, 2026
- Avoid It: Follow the “safe harbor” rule. You won’t face a penalty if:
- You pay at least 90% of this year’s taxes or 100% of last year’s taxes, whichever is less.
- You owe less than $1,000 after subtracting withholdings and credits.
4. Dishonored Check
If your check to the IRS bounces, you’ll face this penalty.
- Penalty: The IRS charges 2% of the check amount if it exceeds $1,250. For smaller amounts, the penalty is $25 or the check amount, whichever is less.
- Avoid It: Ensure sufficient funds before issuing a check or use electronic payments to reduce the risk of errors.
Interest Rates on Underpayments
For 2024, the IRS charges 8% annual interest on unpaid taxes, compounded daily. Paying your taxes promptly avoids these extra costs.
How to Avoid Tax Penalties
- Adjust Your Withholding: Use the IRS Tax Withholding Estimator to ensure the correct amount is withheld from your paycheck.
- Pay Quarterly Estimated Taxes: If you earn self-employment or non-wage income, make estimated payments on time to avoid penalties.
- File On Time: File your tax return by the deadline, even if you can’t pay the full amount. Filing reduces penalties and shows good faith.
- Set Up a Payment Plan: If you can’t pay your taxes in full, arrange a payment plan with the IRS. This reduces penalties and keeps you compliant.
- Use Electronic Filing: E-filing reduces errors and speeds up the process. Most tax software also checks for common mistakes.
- Keep Accurate Records: Organize your income, deductions, and credits throughout the year. Accurate records make filing easier and reduce errors.
- Consult a Professional: If your tax situation is complex, work with a professional to navigate requirements and avoid costly mistakes.
Why Taking Action Matters
Tax penalties add up quickly, but you can avoid them with proactive steps. File on time, pay taxes as you go, and set reminders for quarterly deadlines. If you face penalties, act promptly. Contact the IRS, explain your situation, and pay what you can to avoid further costs.
Preparation and attention to detail help you stay compliant and minimize stress during tax season. By understanding penalties and taking preventive steps, you can save money and stay in good standing with the IRS.