Avoid these 5 Tax PenaltiesJune 04, 2020
Don’t let the IRS increase your tax liabilities! Here are five of the worst tax penalties and how you can avoid them.
Taxes already represent a huge cost for most, don’t add insult to injury by being penalized by the IRS! Here, we highlight five of the worst tax penalties and how you can avoid them.
- Unpaid payroll taxes- Make sure you’re collecting, reporting and paying payroll taxes. If you’re found to be responsible for unpaid federal payroll taxes that were withheld from employee paychecks, you could be personally liable for 100% of the unpaid tax amount. The penalty generally applies to small business owners even if you officially designate someone else for the job. You can avoid this penalty only if you show that your failure to deposit the taxes was due to “reasonable cause,” rather than “willful neglect.”
- FBAR filings- If you had an interest in foreign financial accounts (FFA) with an aggregate value exceeding $10,000 anytime during the prior year, you must file a foreign bank account report (FBAR) with the Financial Crimes Enforcement Network (FinCen) by April 15, 2020. The penalties for failure to file an FBAR are steep. If you are found to have willfully neglected to file, you may be assessed a fine of up to $100,000 or 50% of the balance in the account for each violation. Acts of fraud or providing false information result in greater penalties including a prison term.
- RMDs- If you turned 70 ½ in 2019, you have to begin taking required minimum distributions (RMDs) from qualified plans by April 1, 2020. The RMD age increases to 72 for everyone born July 1, 1949 or later. Check out our blog: SECURE Act Changes for RMDs. If you don’t take your RMD by the required time, you may be assessed with a penalty equal to 50% of the amount that should have been withdrawn (or the difference between the required amount and a lesser amount actually withdrawn). Make arrangements to take your properly calculated RMDs in a timely manner…you don’t want to be hit with one of the most expensive tax penalties in the books!
- Early withdrawals- You are only able to withdraw from qualified retirement plans and IRAs after age 59 ½. If you withdraw before that, you generally owe a 10% penalty tax on top of the regular income tax hit. There are exceptions to this penalty but a good rule of thumb is to take an early withdrawal if you need it and then roll it back into a qualified plan or IRA within 60 days. There’s no income tax or penalty for this situation.
- Late filing- Watch out for tax filing penalties! The IRS can hit you with penalties for filing late or underpaying what is due. If you file late, you’ll owe 5% of the tax owed per month, or part of a month that your return is late, for up to five months. If you don’t pay the full amount due, you’ll have to pay a late payment penalty equal to 0.5% of the actual tax owed for each month or part of the month that the tax remains unpaid. The IRS will also add an interest charge penalty to your tax bill. Another reason to get it in on time and in full!
*Note that recent events have extended the tax deadline for the majority of taxpayers to July 15, 2020. Check out our blog for the details.
Questions on these penalties and if you’ve successfully dodged them? We can help assess your individual circumstances. Contact us.