As the tax filing deadline approaches, it is time for a reminder on penalty mitigation strategies. Under withholding or paying too little in quarterly estimated tax payments can result in a size-able tax bill.
The first tip is to file your tax return prior to the April 17 deadline. The late filing penalty is the larger of two potential penalties and adds up at 5 percent of your tax balance per month you are late (up to a maximum 25 percent).
When you know you will not be able to get a tax return filed by the deadline, at least file a request for a six-month extension. This will give you until October 15 and avoid one penalty.
Limiting failure to pay consequences
If you cannot pay the full balance you owe, make a payment of what you can to lower the outstanding amount. This will reduce the amount of interest added onto the balance.
The late payment penalty is 0.5 percent per month or part of a month that you have a balance outstanding.
Requesting an extension to file will not avoid the late payment penalty. When you are close to having enough to pay off the bill, you can avoid a late payment penalty by paying 90 percent of what you owe. You would owe the remaining 10 percent by the October deadline.
Another way to avoid these two penalties is by notifying the IRS of a reasonable cause that explains the delay. If you are able to show that you were not able to file your return on time because of your home was damaged by a wildfire or you had a death in the family, the IRS may waive the failure-to-pay and failure-to-file penalties.
In our next post, we will discuss ways to protest a civil penalty assessment. Over the past few years, the IRS has granted about 20 percent of requests for penalty abatement.