As the year is coming to an end, it is an ideal time to make an appointment with your accountant to determine if there are any end-of-year transactions or actions you should take to avoid IRS tax penalties, such as the late tax filing penalty. There are dozens of penalties written into the tax laws, although many do not come up for most taxpayers. However, there are a few that are more common than you might think. Here are some you should know about, as well as some important dates to get on your calendar.
- Late Tax Filing- The last couple of years, we have had extra days to file because April 15 fell on the weekend or Emancipation Day, a legal holiday in Washington, D.C. That isn’t the case for filing your 2019 taxes, so be sure to file by April 15, 2020. The current penalty for late tax filing is 5% for each month or partial month that it is late, up to a maximum penalty of 25%; however, if your return is over 60 days late, there’s also a minimum penalty for late filing.
- Failure to Pay- Even if you file an extension, you must still send in the amount of taxes due when you file the extension, as it is not an extension to pay. It is important to note that you can be assessed both for late tax filing and failure to pay at the same time. Using an online calculator can assist you with determining what these two penalties can amount to.
- Nonqualified Withdrawals- If you use funds from a health savings account, 529, or similar tax-favored account for a nonqualified use, you can expect to pay a penalty. There are some exceptions, so discuss this with your tax accountant.
- Early Withdrawals- Taking money out of a tax-advantaged retirement account prior to age 59 1/2 results in a penalty and tax consequences. There are exceptions to this rule that you can discuss with your tax accountant.
- Failure to Pay Estimates- Self-employed taxpayers and other situations dictate the need to make estimated tax payments throughout the year. If you don’t, you’ll face a penalty if you do not meet the safe harbor criteria of having paid at least 90% of current tax liability or 100% of previous year’s amount (or 110% for some taxpayers).
- Excess Contributions- If you put more than allowed into a tax-favored account, this results in a penalty.
If you have questions about late tax filing and other IRS tax penalties, give us a call at Proctor & Assocs. We recommend consulting with us before making any financial transaction decisions that could result in tax consequences or penalties so you can the best decision for your situation. As the year is winding down, it is a good time to consult with us about end-of-year decisions that can minimize your tax burden. Call today to learn more.