Salaried workers, solo entrepreneurs, and business owners should all understand how penalties work, as this will protect them from serious tax troubles in the future. In critical cases, they can take the help of the best tax attorney in California or at other locations who can guide them in such situations.
You will find out about the basics of these charges, the usual penalties, and what actions you can take to avoid the problem getting worse.
1. What Are IRS Penalties and Interest?
People who do not follow U.S. tax laws may be charged with IRS penalties and interest. They punish people who break the law and also deter others from doing the same. Instead of a simple fine, these charges start to build interest over the years, so if nothing is paid, they continuously increase in size, sometimes turning into twice or three times the original debt.
There are two important aspects:
When a certain action is not properly followed, a fixed or percentage amount is due for penalties (such as late filing or underpaying).
On the unpaid tax and interest, the payments were based on daily interest.
2. Common IRS Penalties That Add to The Tax Debt
The common IRS penalties come from multiple things that add to the overall cost of the tax debt.
a) Failure-to-File Penalty
Among all penalties handed out by the IRS, this is one of the most difficult to handle. Not filing your tax return by the due date will usually lead to a 5% fine each month, to a top amount of 25% of your tax bill. Returning your taxes after 60 days incurs the penalty of $485 in 2024 (for the 2023 taxes) or 100% of the tax owed, whichever is lower.
b) Failure-to-Pay Penalty
Even if you fulfill the filing task properly and on schedule but don’t pay the full tax, you are required to pay a monthly failure-to-pay penalty of 0.5% per month, with a maximum penalty of 25%.
c) Underpayment of Estimated Taxes
Not making the correct estimated quarterly payments can result in extra penalties for self-employed people and those who earn a lot. As you earn your income, the IRS requires taxes to be paid rather than just at tax filing.
d) Accuracy-Related Penalties
A 20% penalty may be assessed by the IRS when it sees that a taxpayer has seriously underpaid, neglected filing, or broken the rules.
e) Common IRS Penalties That Add to The Tax Debt
Each day, interest is charged on the outstanding taxes and penalties, and it keeps growing. Interest rates are made by adding three percent to the federal short-term rate and are updated every quarter.
As a result, even when penalty charges are halted, your debt will keep increasing unless you have cleared all the charges. Here, the tax attorney from San Diego, CA, or another place can help the individual to settle the back taxes with the IRS.
Failure to pay a $10,000 tax for six months may mean you must pay $12,000 or more when fines and interest are added.
If you know how these charges work and act with legal and financial help, it can prevent your business from going broke.