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What is an IRS penalty and how do I know I owe one?
A penalty is a charge made by the IRS on an individual or organization that doesn’t meet tax obligations. Penalties can be made for things such as late payments, incorrect payments, or missing information on your tax return. A penalty can also be the result of an IRS audit when a mistake is found on your tax return.
The IRS will let you know when you’ve received a penalty. You’ll get a notice in the mail detailing the reason for your charge, how much you owe, and next steps for addressing it. Make sure to double-check that the information is correct—not even the IRS is free from making mistakes!
6 common IRS penalties to avoid
To avoid a penalty from the IRS, it’s important to understand the different kinds of penalties and to whom they apply.
In general, these are the six most common penalties imposed on small businesses:
- Information return penalties
- Failure to file penalties
- Failure to pay penalties
- Accuracy-related penalties
- Failure to deposit penalties
- Underpayment of estimated tax by corporations and individuals penalties
1. Information return penalties
This type of penalty is charged when an information return or a payee statement isn’t filled out correctly or on time.
For example, if you were to send a 1099-NEC form to an independent contractor but then failed to file the form in time with the IRS, this would be flagged as a penalty.
The IRS will charge a separate penalty for each information return and payee statement that is filed late (or not at all) with the IRS. The yearly penalty amounts are pre-determined by the IRS based on the date the return was filed.
How to avoid them
Make sure all of your payee statements and returns are filled out correctly, well before the deadline. This will help you stay on top of filing on time—and keep the IRS out of your mailbox!
2. Failure to file penalties
The failure to file penalty works in the same way that it sounds: This is a penalty you’ll receive if you fail to file a tax return on time.
For instance, if an S corp doesn’t file Form 1120-S by the due date, a penalty is charged for the taxes paid late.
The failure to file a penalty is based on two things—how late your tax return is filed and the amount of unpaid taxes at the time of the original due date.
How to avoid them
If filing on time isn’t possible for your business, you have the option to proactively apply for an extended due date or tax payment plan. If you need help, don’t be afraid to reach out to a tax professional to help you get ready to file.
Helpful resources:
- What Happens if You Don’t File Taxes for Your Business
- How Long Can You Go Witout Filing Taxes?
- What’s the Penalty for Not Filing my LLC Tax Return
3. Failure to pay penalties
If the IRS finds that the reported tax on your return is not paid by the deadline, you’ll be penalized for a late payment.
For example, if a C corp files its taxes by April 15, 2023, but doesn’t pay the amount of tax due by the same date, you’ll receive an IRS penalty for late payment.
The amount you owe to the IRS is based on how long your overdue taxes remain unpaid. The longer you wait to pay, the more your penalty will be. The penalty is calculated based on two things: your failure to pay the amount shown as tax, and the tax that wasn’t reported on your return.
How to avoid them
Get familiar with your tax deadlines, plan ahead, and don’t be afraid to apply for an extension if you need more time.
4. Accuracy-related penalties
Accuracy-related penalties are charged when incorrect or missed claims are made.
Let’s say you miss claiming a portion of your total income or claim deductions or credits that you aren’t qualified for—you could be penalized for an inaccurate claim.
If you receive an accuracy-related penalty, you’ll owe 20 percent of the total amount reported on your tax return that was underpaid due to inaccurate reporting.
How to avoid them
You can avoid inaccuracies in your tax return by becoming familiar with best practices for filing, relevant deadlines, and tax rules and regulations.
5. Failure to deposit penalties
The IRS imposes this penalty on employers who file their employment tax deposits inaccurately or late.
For example, if your employer fails to deposit the monthly federal income withheld from your paycheck, they would be charged a penalty.
The failure to deposit penalty is based on the number of days that a required deposit is late, starting from the due date.
How to avoid them
To avoid a penalty for failing to deposit employment tax, you can get familiar with schedules, due dates, and forms that can help you file on time.
6. Underpayment of estimated tax by corporations and individuals penalties
This penalty applies to corporations or individuals that don’t pay their estimated tax payments in full or on time. The penalty may even apply if the IRS owes you a refund.
The IRS calculates your underpayment penalty based on the difference you owe when your payment is due, and the applicable interest rate.
How to avoid them
You can avoid underpaying your taxes by utilizing electronic funds transfer for tax return payments, taking some time to calculate your taxes ahead of time, and applying for a quick refund when you overpay your tax.
I’ve received a penalty from the IRS: What do I do now?
Missing a deadline or making a mistake on your tax return isn’t ideal, but it doesn’t mean you’re out of options. You can still file your taxes late, make corrections on your tax return, and pay what you owe to the IRS. You also have the option to remove, dispute, or reduce your penalty, or apply for one-time forgiveness from the IRS.
How Bench can help
Having up-to-date bookkeeping and accurate records will help you set yourself up for success when it comes to filing your return. That’s where Bench comes in. Our expert team makes sure that your finances are done right. We guarantee accurate, IRS-compliant books to help you file on time (and without the risk of penalties). Learn more.
