U.S. Tax Authority Penalties and Interests
Taxes have been the primary source of government revenue for centuries, and the United States is no different. Even more interesting is that failing to pay taxes is considered a federal crime and it is always punishable by law. By simply failing to file your taxes, in time, you could end up paying thousands of dollars to the IRS in penalties and interest.
In the United States, you either file federal and/or state taxes. However, some states within the United States do not collect personal income taxes. These include the states of Wyoming, Tennessee, Alaska, South Dakota, Florida, Nevada, Texas, and Washington. Despite this, the federal taxes remain applicable and must be filed in time.
So, what does filing a tax return mean?
A tax return is a form submitted to a country’s tax authority detailing the gross income, expenses, deductions, or tax credits of an individual. In the United States, the Internal Revenue Service is mandated to collect Federal taxes from all citizens who are eligible to pay taxes. Just by filing your taxes, you’ll know whether you have a tax liability or a tax refund.
There are several taxes payable to the US federal government. They include income tax, capital gains tax, corporate tax, sales tax, excise tax, and property tax among others. For this article, we will be discussing individual income tax, and the IRS penalties applicable when one fails to pay or file a tax return within the due date.
The IRS collects individual income tax from all employed citizens. The amount collected is always determined by an individual’s income. Self-employed persons have to remit to the taxman the SE tax, which is often estimated tax quarterly. Additionally, you have to file income tax on your net earnings from self-employment.
Self-employment for expats
For expats and US citizens living abroad, self-employment can be tricky. Unless the country you’re living in has a Totalization Agreement with the United States, you may have to pay self-employment taxes to the IRS and the country you’re living in.
What may lead to IRS penalties?
The IRS outlines the criteria for what defines a taxpayer. As a citizen, you must not only be aware of your tax obligations but also pay and file your taxes at the right time. One may have to pay the IRS money in penalties and interest for the following reasons
a) Late filing of tax returns.
Any return filed after the IRS stipulated due date, April 15 (days added for weekends) is regarded as late filing. If you are filing your taxes a day or a week late, you are likely to incur fewer penalties compared to filing a tax return months later. If you cannot file your taxes before the due date, you must apply for an extension on time, which means before April 15.
b) Late payment of taxes due.
Payment of all taxes due must be done by the IRS due date. The IRS may issue penalties for late payment if a check is dishonored by the bank or late processing of payment. Even with a payment plan, the penalties will pile up for the months the taxes remain unpaid.
c) Providing inaccurate or false information on the tax return form.
When preparing your return, the information you provide to the IRS needs to be accurate down to the last cent. Providing misleading information intentionally will attract penalties and possibly interest. Moreover, the IRS may impose penalties if you don’t report all your income or you claim deductions or credits for which you don’t qualify.
IRS penalties and interests.
1. Late filing penalties
The IRS demands a 5% monthly penalty on all taxes filed after the due date. Of course, this is capped at 25% maximum of all the total taxes due. If your return was over 60 days late, the minimum Failure to File Penalty is $435 or 100% of the tax required to be shown on the return, whichever is less. This is applicable for tax years 2020, 2021 and 2022.
2. Late Payment penalties
The IRS allows for a maximum of ten days after filing the tax returns to pay any pending taxes. Failure to pay the taxes due in time will result in a 0.5 % penalty of the unpaid amount for every month the taxes remain unpaid from the IRS. This is applicable to a maximum of 25% of the total unpaid taxes. In addition to the penalties, the IRS charges interest calculated at a daily interest rate of 5%.
3. Accuracy-Related Penalty
This penalty applies when you fail to disclose all your income leading to underpayment of taxes. If it is the result of an error or simple negligence, a penalty of 10% of the tax required or $5,000 may be charged, whichever is greater.
If the accuracy-related penalty is a result of a substantial and intentional understatement of income which may result in underpayment of taxes. In such a scenario the IRS may impose up to a 40% penalty of the tax required to be shown on the return.
4. Ex-pats & US Citizens Abroad
This can be confusing!
Any tax due is due by April 15, even though tax returns don’t have to be filed until June 15.
US citizens abroad get an automatic two-month filing extension which is why their filing deadline is June 15. This is only a filing deadline, not a deadline for making tax payments.
Tax payments are still due by April 15. This often catches out those living abroad.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
Interesting Facts about IRS penalties
Ø If you make an overpayment of taxes due, the IRS pays interest on your overpayment.
Ø If both the late filing penalty and late payment penalty are due or coincide on the same month, the late filing penalty is reduced by the amount of the late payment penalty for that month.
Ø One may request penalty relief if he or she tried but failed to comply with the IRS tax regulations for reasons beyond their control. Eligibility and approval of penalty relief is a matter of consideration by the IRS.
Ø The IRS requires U.S citizens to declare foreign assets as well as foreign bank accounts for tax purposes.
How to avoid IRS penalties
All US citizens paying income tax have between January and April to file their individual tax returns for the previous year. For instance, to be on time, you can file your 2022 return from January 2023 to April 15, 2023.
IRS e-filing usually opens around the third week of January.
For taxpayers living overseas, you can mail your tax return to the IRS. Effectively, the day you post the tax return is your filing date. Even if you live in Australia and post your tax return on April 15 from a post office in Australia, you’ve filed on time.
If you find yourself in a situation where you can’t file your taxes in time, you can request a six-month extension. This extension gives you until October 15 to file your return. You must request the extension before April 15.
Expats can also request an extension to October 15, but they already get an automatic filing extension to June 15. Because of that automatic extension, they can request their October 15 extension by June 15.
Remember, you still have to pay all taxes before the IRS due date of 15th April, otherwise you’ll be charged interest.
A filing extension only saves you from a late filing penalty, not interest charges.
The only sure way to avoid IRS penalties is to pay your taxes in time and file your tax returns in time.
Frequently asked questions.
- How can I reach the IRS?
You can reach the IRS through their toll free line 1-800-829-1040 for assistance, and also try +1 267 941 1000 from abroad.
- I am a US citizen living abroad, am I still required to pay income taxes to the IRS?
There is a big difference between paying US tax and filing a US tax return.
Almost every US citizen (including dual nationals) has to file a US tax return no matter where they live in the world.
Having to pay US tax on your non-US income depends on the country you live in, but most US citizens living in another country don’t have to pay US taxes, but they must file a US tax return reporting their worldwide income.
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