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. 2024's inflation adjustments means that next year late filers could face a $00 penalty. That's up $50 from the $485 late-filing penalty for 2023 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 2024 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 2024 that began Oct. 1, the interest rate is 8 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 you might recall from the confusion surrounding the automatically delivered COVID-19 pandemic 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 2024 tax return that is filed late in 2025 is $245. That's a slight increase from the current $235 penalty.
Failure to file a 2024 tax year S Corporation return in 2025 also will get the owner a $245 change. Again, that's up from the current $235 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 2023-34. 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 $330 per return. That's a slight increase from the current $310 per return penalty. The total penalty amount that can accrue in the 2024 calendar year is $1,329,000. Again, that's up from the current $1,261,000 maximum.
When the required information return is corrected on or before 30 days after required filing date, the penalty in 2024 will be $60 (the same as in 2023) per return, with a $232,500 (up from $220,500 in 2023) maximum. If it's corrected after 30th day, but on or before August 1, 2025, the penalty is $130 (up from this year's $120) per return, with a $664,500 (up from 2023's $630,500) maximum.
When the failure to file correct information returns is intentional, in most cases the penalty is the greater of $660 (up from $630) 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 professionals, 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 2024 tax-year inflation adjusted amounts for returns to be filed in 2025, both per violation and maximum that can be assessed, are:
Tax Preparer Action
Fails to furnish a client with a copy of the return
Fails to sign return. When a preparer is paid to do taxes, he/she must sign the client's Form 1040.
Fails to furnish identifying number. This goes along with the signature mandate.
Fails to retain a copy of the return or other filing list.
Fails to file correct information returns.
$60 per return and item in return
Negotiates a taxpayer's check.
Fails to be diligent in determining a filer's eligibility for head of household filing status, the American Opportunity Tax Credit, the Child Tax Credit and/or the Earned Income Tax Credit (EITC).
Those $60 tax preparer potential penalties for 2024 are the same as the 2023 amounts. However, the maximum penalty amounts, which are $30,000 in 2023, go up next year $1,500. The minimum penalty for preparers with regard to taxpayer refund checks and tax eligibility diligence instances goes up next year $35 from 2023's $600 level.
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 by refusing last year 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 2024 is $62,000. This passport-related debt amount adjustment is up from 2023's tax debt trigger of $59,000.
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.
Under Internal Revenue Code §7201, any person who willfully attempts to evade or defeat taxes can be charged with a felony, with penalties including up to $100,000 in fines ($500,000 in the case of a corporation), up to five years in prison, and the costs of prosecution.
Obviously, you don't want to break any tax laws that will get you in trouble with Uncle Sam, at either level. But some folks find themselves going from relatively small tax violations to major criminal tax trouble.
That's why this Part 9 of the ol' blog's annual tax inflation series also is doing time as the Tax Felon Friday item today.
The end of inflation, or at least the series: This Part 9 of the annual inflation posts also marks a break in the 10-part series.
The final post of the year will be on the IRS deductible mileage adjustments. But if the IRS follows its usual schedule, those amounts likely won't be announced for a few more weeks.
The IRS typically issues its annual revisions to the optional per-mile rates you can claim as deductions in connection with business, medical or, in military relocation cases, moving miles.
Whenever those per-mile amounts are released, I'll let you know in the pending-for-now Part 10 post. In the meantime, the box below notes how you can review this year's prior inflation series posts.
Thanks for reading this part and all the rest. And thanks especially for your tax inflation interest and explanation patience.
Thanks for reading. And thanks especially for your tax inflation interest and explanation patience!
|This post on inflation's effects on 2024 tax penalties
is Part 9 of the ol' blog's annual series on myriad tax-related inflation adjustments.
The 10-part series started with a look at next year's
income tax brackets and rates.
At the end of that first item there is a directory
of all of the 2024 tax-related inflation changes.
Note: The 2024 figures in this post apply to that tax year's return to be filed in 2025.
For comparison purposes, you'll also find 2023 amounts that apply
to this year's 2023 tax returns that will be due April 15, 2024.
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