The IRS (Internal Revenue Service) has recently announced a significant increase in underpayment penalties, more than doubling the fees from two years ago. This change can have profound implications for taxpayers, potentially leading to substantial fees being added to their bills. In this blog post, we’ll explore the reasons behind the IRS’s decision, the impact on taxpayers, and how to avoid falling into the trap of these “giant fees.”
The IRS has raised its underpayment penalties due to inflation, charging an 8 percent interest rate on the amount due. This is a considerable jump from the 3 percent rate imposed in 2021.
Miscalculating the amount owed to the IRS and underpaying quarterly taxes can result in added interest and penalties. What causes this miscalculation? Typically not paying self employment taxes quarterly, miscalculating winnings and losses on gambling, miscalculating stock transfers, or using too many deductions for payroll. The fees for underpaying estimated taxes have drastically increased, making it more crucial than ever for taxpayers to accurately determine and pay their tax obligations. In 2022, the IRS handled over $1.8 billion in late charges on approximately 12.2 million individual tax returns, showcasing the significant impact of these penalties.
While the increased penalties may be worrisome, there are exceptions. Taxpayers with a balance less than $1,000 or those who paid at least 90 percent of the taxes owed for the year on time are not subject to penalties. Additionally, individuals who paid 100 percent of the estimated amount from the previous year on time each quarter are exempt.
Staying on top of your payment schedule is crucial to avoid hefty underpayment penalties. This involves keeping track of any additional income generated throughout the year and adhering to the IRS’s payment schedule. Taxpayers should monitor their income levels, adjusting payments accordingly.
The IRS’s decision to increase underpayment penalties underscores the importance of meticulous tax planning and adherence to payment schedules. Taxpayers, especially those with additional sources of income, should be vigilant in accurately estimating and paying their taxes to avoid unexpected fees. Understanding the implications of these penalties is essential for financial planning and ensuring compliance with IRS regulations. As the tax landscape evolves, staying informed and seeking professional advice can help individuals navigate these changes successfully.
If you owe back taxes and underreporting penalties reach out to us today for ways to help your reduce your back taxes and way to help pay. Call us at 732-333-0681 for a free strategy session.