Having to file tax returns every year can be challenging and painful. But what’s worse? The IRS can penalize you for all sort of reasons and it can cost you a great deal of money and time to resolve. Here is a list of penalties that are most encountered by taxpayers.
Penalty for Not Filing and Owing
When it comes to filing taxes, taxpayers often make minor mistakes which can lead to significant consequences. Here are a few examples.
- Failure to File
Say you were so caught up at work and have forgotten to do your taxes by the due date, April 15 or the extended due date (if you did remember to file an extension), you will be subject to a 5% penalty for the unpaid tax each month the return is late. If the tax return is more than 5 months late, the penalty will be 25% of your tax due.
- Failure to Pay
When you file your tax return, you should also pay the amount due. Failing to do so will put you in another 0.5% monthly penalty as well as an interest imposed daily on the unpaid balance. The amount shall be accumulated until the balance due is paid in full. You should also be aware that an extension to file does not equal to an extension to pay. To prevent the failure to pay penalty, you should pay the tax when filing an extension.
The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.
- Failure to Pay Proper Estimated Tax
If you expect to owe $1,000 or more, an estimated tax is required. In cases where you underpay your estimated tax, a penalty will be imposed. It shall be calculated by multiplying the number of days late by the relevant effective interest rate.
- Accuracy-related penalty
Taxpayers who are negligent, careless, reckless or intentionally disregard the rules may be imposed a penalty equal to 20% of any underpayment of federal tax resulting from the behaviour.
The FBAR is required by the Department of Treasury for the purpose of tracking your foreign financial accounts so as to make sure you have no hidden money engaged in illicit activities. The due date for the FBAR is on April 15 every year, with an automatic extension available until October 15. Late submission or inaccuracy of the FBAR may result in minor to severe penalties or fines depending on the person’s facts and circumstances.
- Non-Willful violation
An FBAR that is either late, incomplete or even unfiled is non-wilful. It can be a monetary penalty that gets all the way up to $10,000 per account per year. That could sum up to a remarkable amount if you happen to have multiple foreign accounts.
- Willful violation
If one is proven to deliberately avoid the filing or disregard the existence of certain facts, it’s considered willful. The penalty can be up to $100,000 or 50% of the highest value of the accounts, depending on whichever is higher. In some cases, due to compliance factors, such act may result in criminal prosecution.
Form 5471 Penalty
If you are a shareholder, officer or director of a foreign corporation, there is disclosure required about the foreign corporation on form 5471. The due date of submitting this form is March 15 for corporations and April 15 for individuals. The IRS imposes a $10,000 penalty for each year’s failure (which could be increased for multiple foreign corporations) to file the form. If taxpayers still do not file after being notified by the IRS, the penalty can increase to $50,000.
Form 5472 Penalty
In certain cases, a foreign owned U.S. corporation (including a foreign-owned U.S. disregarded entity) or a foreign corporation engaged in a trade or business in the United States would be required to provide information for Form 5472 if there are reportable transactions.
The IRS has been increasing their enforcement of Form 5472 and any late submissions would be subject to a $25,000 penalty.
Form 8938 Penalty
You may have to file this form if you have an interest in any specified foreign financial assets. The form should be filed together with your annual income tax return by the due date (including extensions of the income tax return). You will be subject to a penalty of $10,000 if you fail to file on time or file an incomplete form.
These are just some of the many examples to illustrate how important it is to file returns and pay your taxes in a timely and accurate manner. The complexities of filing tax returns can often scare people away. Our experienced professionals at American Pacific Tax make sure you get your returns done promptly and flawlessly. Do not hesitate to contact us for further consultation!