Don't Mess With Taxes

The United States' tax system depends on voluntary compliance by taxpayers. But Uncle Sam is no fool.

He and his tax collectors are believers of the adage "trust, but verify."

The Internal Revenue Service also follows up on that verification with penalties when it finds taxpayers — and the professionals we pay to take care of our taxes — aren't fulfilling our tax responsibilities on our own.

The most severe punishments come via criminal tax prosecutions. The IRS also employs civil actions to get due taxes.

And many of us are familiar with the various fines and fees that are assessed when we mess up tax-wise. Yes, I am guilty here, too.

These potential added penalty costs usually are effective in stemming questionable tax actions. After all, no one wants to pay the U.S. Treasury more than absolutely necessary.

Many of the penalties also are adjusted when the IRS announces its overall annual inflation revisions. This post, Part 9 of the ol' blog's 2023 tax inflation series, examines some common inflation-affected penalties that are assessed individual and business taxpayers, as well as tax professionals.

Percentage filing and payment penalties: But before we get to those amounts that change due to the cost of living, it's worth a quick refresher on general IRS penalties for filing and paying your taxes late. These are set percentages of unpaid tax that are charged if you don't file or pay on time.

The IRS imposes a failure-to-pay penalty of 0.5 percent for each month or part of a month that tax goes unpaid, up to a total of 25 percent of the remaining amount due.

The penalty for filing late is steeper. The IRS assesses it at 5 percent of any tax due that isn't paid as of its filing date, usually April 15. Remember, even if you get an extension to file your return as late as Oct. 15, you still must pay any tax due by the April deadline.

If you miss the due date for getting your return to the IRS, the late-filing penalty could go up, like the late-payment one, to as much as 25 percent of unpaid taxes.

Monthly combined charges: In both late (or non) filing or late (or non) paying situations, the fine starts adding up for each month or part of a month that the return is late. And where you face both a failure-to-file and a failure-to-pay penalty in the same month, the combined penalty is 5 percent (4.5 percent for filing late and 0.5 percent for not paying on time) for each month or part of a month that your return was late.

If you still haven't paid after five months, the failure-to-file penalty will max out, but the failure-to-pay penalty continues until the tax is paid, up to 25 percent. And the maximum total penalty for failing to file and pay on time comes to 47.5 percent of the due tax (22.5 percent for late filing and 25 percent for paying late).

Just for good measure, there's also a minimum late-filing penalty if you don't get your Form 1040 to the IRS within 60 days of the due date. 2023's inflation adjustments means that next year late filers could face a $485 penalty. That's up $50 from the $435 late-filing penalty for 2022 returns.

However, the penalty could be less, depending on your tax bill. The tax code says the penalty for filing two months or more late is the lesser of $435 for the 2022 tax year/$485 in 2023 or 100 percent of the tax due.

Penalty relief, but interest still adds up: Taxpayers who have a history of filing and paying on time, but have run into a late tax situation for the first time might be able to have late filing and payment penalties abated.

This special treatment is for taxpayers who haven't been assessed penalties for the past three years and who meet other requirements. You can find more on penalty relief at the IRS' First-Time Penalty Abatement web page.

Regardless of the IRS penalty amounts, interest also accrues on unpaid taxes. The interest rate for individual taxpayers is the federal short-term rate plus 3 percent and is adjusted quarterly. For the fourth quarter of 2022 that began Oct. 1, the interest rate is 6 percent.

The IRS can remove or reduce penalties for reasonable cause, but interest charges just keep accumulating.

No tax due, no penalties: The only folks who don't have to worry about meeting the IRS timetable, at least as far as penalties, are those who don't owe. Since the penalties are based on taxes due, any percentage of zero is zero.

But as the automatically delivered COVID-19 relief payments and Advance Child Tax Credit distributions showed, it's a good idea to file so the IRS has your up-to-date information. You also can send the IRS Form 8822 to let it know of your change of address.

And, of course, you need to file — preferably on time — to get any refund you're due.

Business late-filing fees: The IRS deals with more returns from individual taxpayers than from business filers. But as with individuals, the tax agency also whacks companies that don't file their business returns and other tax paperwork on time.

The penalty for a partnership 2023 tax return that is filed late in 2024 is $235. That's a slight increase from the current $220 penalty.

Failure to file a 2023 tax year S Corporation return in 2024 also will get the owner a $235 change. Again, that's up from the current $220 penalty.

Information return penalties: The IRS also assesses inflation-affected penalties on businesses that do not file correct information returns and/or do not furnish correct payee statements. This includes the filing of, among others, Forms 1098, 1099, and W-2.

The penalty amounts are determined by average annual gross receipts for the last three years and detailed in IRS Revenue Procedure 2022-38. Just search for "information returns."

Here's a look at smaller business potential penalties in these cases.

Entities averaging $5 million or less and that don't provide the IRS required info will face a penalty of $310 per return. That's a slight increase from the current $290 per return penalty. The total penalty amount that can accrue in the 2023 calendar year is $1,261,000. Again, that's up from the current $1,177,500 maximum.

When the required information return is corrected on or before 30 days after required filing date, the penalty is $60 (up from $50) per return, with a $220,500 (up from $206,000) maximum. If it's corrected after 30th day, but on or before August 1, 2024, the penalty is $120 (up from $110) per return, with a $630,500 (up from $588,500) maximum.

When the failure to file correct information returns is intentional, in most cases the penalty is the greater of $630 (up from $580) or 10 percent of the aggregate amount of items required to be reported. There is no maximum penalty in intentional disregard cases.

The IRS offers more details on information return penalties at its special web page, and in Internal Revenue Manual 20.1.7, Penalty Handbook, Information Return Penalties.

Tax pro penalties, 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.

These amounts are set by statute and not subject to annual inflation adjustments.

More tax preparer penalties: In addition to these fixed penalties, however, the IRS can assess a variety of other fines that are adjusted annually for inflation when it determines the tax pro failed to complete these tasks.

The 2023 tax-year inflation adjusted amounts for returns to be filed in 2024, both per violation and maximum that can be assessed, are:

Those tax preparer potential penalties for 2023 are slightly more than the 2022 amounts, which are $55 for the first five penalty cases; $28,000 when it comes to those maximum penalties; and $560 for taxpayer check and tax eligibility diligence instances.

Passport revocation: Finally, if you're an international traveler, make sure you pay your taxes, especially if you owe a lot. In addition to owing financial penalties on the unpaid amount, there's a physical penalty that could curb your global wanderlust. 

The Fixing America's Surface Transportation Act, or FAST Act, that became law in December 2015 included a provision that authorizes the State Department to a to revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt. The U.S. Supreme Court let that passport revocation authority stand earlier this year by refusing to hear an affected taxpayer's case.

When this tax law took effect in 2016, the document revocation trigger was $50,000 in unpaid taxes. Each subsequent tax year, the IRS has the option to adjust this amount upward if inflation allows.

As noted in the inflation series Part 8 on international taxes, the amount of a serious delinquent tax debt that could get your passport pulled in 2023 is $59,000. This passport-related debt amount adjustment is up from 2022's tax debt trigger of $55,000.

Whether you're a taxpayer handling your taxes on your own or a tax preparer, make sure you get the filings right and right on time (or sooner!) or you'll end up paying the U.S. Treasury more in penalties.

The end of inflation, or at least the series: Well, that's it for Part 9 of this year's version of the ol' blog's annual 10-part tax-related inflation series.

The final post of 2023 tax-related inflation adjustments will focus on optional standard mileage rages. But it likely will be a couple of more weeks before we get those numbers. The IRS typically issues its annual revisions to the per-mile rates you can claim closer to the end of the year or early in the next tax year.

Whenever those per-mile amounts are released, I'll let you know in the pending-for-now Part 10 post. In the meantime, you can review this year's post with the original 2022 rates that apply from Jan. 1 to June 30 this year, and the second adjustment in June when inflation started escalating this year. Those higher mid-year mileage rates apply to tax deductible driving from July 1 through Dec. 31.

The 2023 tax year optional standard mileage rates that will be issued later this year likely will be bumped up a bit more.

While we wait for those final numbers, you can check out all the posted-so-far 2023 inflation entries as noted in the box below.  

Thanks for reading this part and all the rest. And thanks especially for your tax inflation interest and explanation patience.

This post on inflation changes in 2023 to tax penalties is Part 9 of the ol' blog's annual series on myriad tax inflation adjustments.  The 10-part series started with a look at next year's income tax brackets and rates. That first item also has a directory, at the end of the post, of all of the posted and upcoming tax-related inflation updates for 2023. Note: The 2023 figures in this post apply to that tax year's returns to be filed in 2024. For comparison purposes, you'll also find 2022 amounts that apply to this year's 2022 taxes that will be due April 18, 2023.

 

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