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Any sports fan will tell you that penalties often ruin not only their teams' chances of winning, but also make the game itself worse.
Taxes certainly aren't a game, but penalties in this part of our financial lives also are frustrating. Worse, they can be costly, to both taxpayers and the tax professionals they hire for filing help.
Some tax penalties are set by law. Others are adjusted each year because of inflation.
Penalties add more to tax bills: Paying taxes is bad enough. Paying a penalty for not filing on time makes that worse.
Recent legislation has made it clear that the Internal Revenue Service doesn't have time to waste. It established some bigger fees for your tardiness, as well as called for inflation-based tweaks each year.
For 2017 taxes, failure to file a tax return within 60 days after it's due in 2018 (including extension time) will add a penalty charge of $210 or 100 percent of the amount of tax due, whichever is less, to your tax bill.
In the case of your 2018 tax return that you must file in 2019, failure to file within 60 days of the deadline (including extensions) goes up five bucks thanks to inflation to $215 or 100 percent of the amount required to be shown as tax on such returns.
Business filers also must file in a timely manner or pay more. Failure to file a 2018 partnership or S corporation return in 2019 will result in a penalty of $200.
Tax pros, too: Since so many of us pay for help with our filing, Uncle Sam assesses penalties on tax pros, too, if they if they knowingly understate a client's tax liability.
In situations where a tax preparer comes up with a filer's tax due that is less than it should be and the reason is because of what the IRS deems is an "unreasonable position," the tax preparer could be hit with a penalty of $1,000 or 50 percent of the payment the preparer got for filing the return, whichever is greater.
Where a tax preparer promotes what the IRS deems is an abusive tax shelter, that penalty is generally equal to $1,000 for each organization or sale of an abusive plan or arrangement or, if the scheme is less than that, 100 percent of the income derived from the activity.
If a tax preparer uses, in the IRS' estimation, willful or reckless conduct to get the taxpayer's liability to an amount lower than it should be, the penalty increases to the greater of $5,000 or 50 percent of the income from the return or claim for refund.
And if a tax pro is found guilty of making fraudulent or false claims, this felony could produce a fine of up to $100,000 ($500,000 in the case of a corporation), imprisonment of up to three years or both, along with paying the costs of prosecution.
The IRS goal in whacking tax pros for bad action when it comes to clients is, of course, to discourage the use of tax strategies that a preparer knew, or reasonably should have known, were not realistic. And to get the correct amount of tax due from filers.
More tax preparer penalties: In addition to the penalties for understating clients' tax bills, there's a variety of other fines, adjusted annually for inflation, that a tax preparer could face for failing to complete some other tasks.
The 2018 amounts are:
|Tax Preparer Action||Penalty per Return or Refund Claim||Maximum Penalty|
|Fails to furnish a client with a copy of his/her return.||$50||$26,000*|
|Fails to sign return. When a preparer is paid to do taxes, he/she must sign that 1040 (or 1040A or 1040EZ).||$50||$26,000*|
|Fails to furnish identifying number. This goes along with the signature mandate.||$50||$26,000*|
|Fails to retain a copy of the return or other filing list.||$50||$26,000*|
|Fails to file correct information returns.||$50 per return
and item in return
|Negotiates of a taxpayer's check. This is a fine for a preparer who receives a taxpayer's refund check, endorses it and deposits it as a third-party check, even if the preparer and taxpayer have agreed to the process. Basically, the check negotiation fine is aimed at return preparers who charge based on taxpayer refund amounts.||$520** per check||No Limit|
|Fails to be diligent in determining a filer's eligibility for the American opportunity tax credit, the child tax credit, and/or the Earned Income Tax Credit (EITC).||$520** per check||No Limit|
Passport revocation: Finally, international travelers better check their tax accounts.
Back in December 2015, the Fixing America's Surface Transportation Act, or FAST Act became law. Part of the measure authorizes the State Department to revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt.
When this tax law took effect in 2016, the document revocation trigger was $50,000 in unpaid taxes. Low inflation kept it at that level for 2017 filings.
However, for 2018, the overdue tax amount that will cause your passport to be pulled goes up to $51,000.
Whether you're a taxpayer handling your taxes on your own or a tax preparer, make sure you get the filings right or you'll end up paying the U.S. Treasury more in penalties.
This look at changes to some tax penalties
is Part 8 of the ol' blog's series on 2018 inflation adjustments.
You can find links to all 2018 inflation posts in the first item:
Income Tax Brackets and Rates.
Note: The 2018 figures apply to 2018 tax returns that are due in 2019.
For comparison purposes, you'll also find 2017 amounts to be used
in filing 2017 tax returns due next April.
You also might find these items of interest:
- How to avoid estimated tax penalties
- Filing season 2018 starts … IRS not yet sure
- 4 moves to make if you missed the April tax filing deadline