California Taxpayers Beware: Common IRS Penalties and How to Avoid Them

Tax season is here and in full swing. For many San Francisco business owners and taxpayers, navigating the complexities of taxes can be intimidating. And it can be especially daunting knowing the Internal Revenue Service (IRS) is keeping a close eye on your compliance. Many San Francisco taxpayers and business owners end up owing the IRS penalties that can easily be prevented. Let’s look at common IRS penalties and how to avoid them.

Failure to File — This is one of the most significant penalties a taxpayer may face and it is imposed when a tax return is not filed by the deadline, which is generally April 15. The penalty is based on how late you file your tax return and the amount of unpaid tax you incur on the original payment due date. The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late, with it not exceeding 25% of your unpaid taxes. To avoid these fines, be sure to file your taxes on time. If that’s not possible, request an extension to avoid the penalty.

Failure to Pay — Another common penalty is the Failure to Pay penalty. This occurs when a taxpayer has filed their taxes, but does not pay the money owed to the IRS by the filing deadline. This penalty is generally 0.5% of your unpaid taxes for each month or part of a month your taxes remain unpaid, up to a maximum of 25%. The surest way to avoid the Failure to Pay penalty is to pay your tax debt by the filing deadline. However, if that’s not possible, you can apply for a payment plan or installment agreement. You can also pay estimated taxes throughout the year to avoid one large sum owed when you file. 

Accuracy-Related Penalty — This penalty applies when the taxpayer underpays the tax required. Underpayment generally happens when you do not report all your income or deductions and credits are claimed and don’t apply. There are two types of accuracy-related penalties: negligence or disregard of the rules or regulations and substantial understatement of income tax. Negligence is when you don’t make a reasonable attempt to follow the tax laws when you prepare your tax return. Disregard means you carelessly or intentionally ignored the tax rules or regulations. To avoid this penalty, make sure to double-check your tax returns for accuracy or work with an experienced tax preparer to ensure your returns are accurate. 

Underpayment Penalty — Taxpayers may face an underpayment penalty if they do not pay enough tax throughout the year, either through withholding or estimated tax payments. This penalty is calculated based on the amount of tax you owe and how much you should have paid throughout the year. To avoid this penalty, you can adjust your withholdings so the IRS receives more payment from your paychecks. Or you can make estimated tax payments on a quarterly basis.

Dishonored Checks or Payments — This penalty applies when your bank does not honor your check or other form of payment, or if you do not have enough money in your bank account to cover the payment you made for the taxes you owe. If this occurs, the IRS will send you a notice with the fee information. The penalty is calculated in the following way: if the check is less than $1,250, the penalty is the payment amount or $25, whichever is less. If the amount is more than $1,250, the penalty is the payment amount is 2% of the payment amount. 

Failure to Report Foreign Accounts — This fee applies to certain taxpayers who fail to timely and correctly report foreign sourced financial activity. The penalties for failure to file a Report of Foreign Bank and Financial Accounts (FBAR) or Foreign Account Tax Compliance Act (FATCA) can be severe, and sometimes come with criminal prosecution. To avoid these penalties, familiarize yourself with the reporting requirements and work with an experienced tax professional to ensure you or your business pay the correct amounts.

San Francisco taxpayers and business owners must be vigilant and comply with IRS regulations to avoid facing penalties. It’s always best to work with an experienced tax professional or tax attorney to make sure you are in compliance with the IRS and do not incur expensive penalties.  

Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego. 

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Allison Soares

Allison Soares, a renowned tax attorney, excels in representing clients before the IRS, FTB, EDD, and CDTFA. With a Bachelor of Arts in Finance from the University of Wisconsin, Milwaukee, and a transformative teaching stint in Brazil, Allison’s diverse background enriches her legal expertise. She pursued law at St. Thomas University School of Law, Miami, complementing it with an MBA in accounting and forensic accounting. Further honing her skills, she obtained a Master of Laws in Taxation from the University of San Diego School of Law. As an adjunct professor at San Diego State University, Allison imparts her knowledge in tax procedures, practice, and ethics. Her accolades include being named Best of the Bar by the San Diego Business Journal and multiple Super Lawyer recognitions. Committed to community service, she volunteers with Forever Balboa Park and Friends of Balboa Park. Allison’s authoritative contributions in tax law are showcased through her publications and speaking engagements.

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