Articles Posted in Tax Penalties

Nearly every adult in the U.S. must file an annual federal income tax return with the IRS that discloses their income, identifies tax deductions and credits, and states the amount of tax that is owed. What happens if a taxpayer fails to file on time? The consequences could include penalties and interest, as well as limits on the ability to obtain relief if they cannot afford to pay their tax bill.

What Are the Tax Deadlines?

Federal income tax returns are due on April 15 of each year. If the 15th falls on a Saturday, Sunday, or federal holiday, the due date is the next business day. California has the same deadline for state income tax returns.

Taxpayers may be able to obtain an extension of up to six months to file their federal tax return. This typically requires filing an extension form, and paying their estimated tax owed, prior to the April deadline.
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Our tax system requires most taxpayers to make regular payments to the IRS throughout the year. The tax return that is due to the IRS every April 15 shows the final amount of tax owed for the year, as well as the amount of tax already paid by, or on behalf of, the taxpayer. If the amount paid is less than the amount owed, the taxpayer could be liable for underpayment penalties. In January 2019, the IRS announced that it was expanding eligibility for waivers of underpayment penalties. Taxpayers who paid at least eighty-five percent of their final tax bill can have their entire underpayment penalty waived.

Ongoing Tax Payments

Federal income tax is a “pay-as-you-go” system. Taxpayers must pay tax on the income they earn as they earn it. Payments are due every quarter.

Employers can withhold taxes from their employees’ paychecks. The amount of withholding is based on information provided by each employee on Form W-4. Every quarter, employers must remit all amounts withheld from payroll.
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Businesses are required to file annual income tax returns with federal and state tax authorities, and they may also have to file payroll and sales tax reports. Failing to file a return on time can lead to penalties, interest, and other consequences. Even if you or your business is not able to pay the full amount of tax owed, it is better to file a return on time. For most types of tax, the IRS and state authorities are willing to allow a payment plan. The most notable exception is federal payroll tax. To avoid any penalties, you should promptly consult a California tax lawyer who can advise you on your obligations.

What Taxes Does My Business Have to Pay?

Businesses in California must pay federal and state income tax. The federal form they must use depends on the type of business entity, such as a corporation, limited liability company (LLC), partnership, or sole proprietorship.

If a business has employees, it must pay payroll taxes and file a separate return with the IRS. Employers must also pay into federal and state unemployment insurance funds. Businesses that sell goods or provide services deemed taxable by state and local law must collect sales tax from customers and file reports with the state.
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The IRS recently issued out a warning to taxpayers who owe tax and have not filed their 2018 tax return, or a valid extension, to act before Friday, June 14, before facing higher penalties. Although the IRS lowered the threshold for imposing under withholding and underpayment penalties earlier this year during tax season due to the complications in the 2017 tax law and various changes it made in the withholding rules, the leniency did not apply to the failure-to-file penalty.

Under section 6651 of the Internal Revenue Code, a failure-to-file penalty is assessed if a taxpayer has unpaid tax and fails to file a tax return or request an extension by the April due date. This penalty is usually 5 percent of tax for the year that’s not paid by the original return due date. The penalty is charged for each month or part of a month that a tax return is late. But, if the return is more than 60 days late, there is a minimum penalty, either $210 or 100 percent of the unpaid tax, whichever is less.

However, the IRS is not completely heartless in the application of the failure-to-file penalty. The IRS recognizes special deadlines that affect penalty and interest calculations for certain taxpayers who qualify, such as members of the military serving in combat zones, taxpayers living outside the U.S., and taxpayers living in presidentially declared disaster areas.  Taxpayers in combat zones, such as members of the military, can extend the filing deadline and find the details of the extension in Publication 3, Armed Forces’ Tax Guide.

With the federal tax due date of April 15 fast approaching, some people may worry about being able to pay their tax bill on time. Several options are available, each with benefits and drawbacks. Any taxpayer who worries about covering their bill should carefully consider each of these options. Nobody should skip filing their tax return by the due date. The penalties for failing to file a return on time can be far worse than for failing to pay in full, and it could cut you off from some of the following options for payment extensions in the future.

Request a Payment Extension

Federal tax law permits extensions of time for an individual to pay income tax. The IRS has decided to allow this when a taxpayer can demonstrate that they will experience “undue hardship” if required to pay in full right away. They may request an extension by filing IRS Form 1127.

The IRS states in the instructions for this form that “‘undue hardship’ means more than an inconvenience.” The taxpayer “must show [they] will have a substantial financial loss (such as selling property at a sacrifice price).” This requires submitting substantial information on assets, liabilities, income, and expenses.
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