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Are you tired of tax season stress and surprises? Do the words "IRS penalties" keep you up at night? Tune in to this Tax Talk Thursday episode with Ralph Estep Jr. as he reveals the most common penalty pitfalls taxpayers face - and shares some valuable penalty prevention tips.
In this episode of Tax Talk Thursday, host Ralph Estep Jr. delves into the stressful world of tax season and IRS penalties. Ralph reveals the most common penalty pitfalls taxpayers face and shares essential strategies to avoid them. Learn about the hefty failure to file penalty, and discover how underpayment penalties apply if you owe over $1,000. Tune in to uncover the IRS' favorite fees, see if you're penalty-proofing properly, and learn how to keep more of your hard-earned money come tax time.
00:00 Episode Overview About Common IRS Penalties
00:18 Welcome To Tax Talk Thursday
01:21 Daily Bible Verse
01:54 Failure To File Penalty
03:02 Failure To Pay Penalty
04:14 What Options Do You Have To Pay What You Owe?
05:17 Underpayment Penalty
06:22 Accuracy-Related Penalty
07:16 Bible Principle To Diligently Manage Tax
07:30 Final Thoughts and Recap
08:33 Outro
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Ralph Estep Jr. [00:00]
Do you know the most common penalties the IRS charges taxpayers? But more importantly, do you know how to avoid them? Well, stay tuned today to find out! I'm going to let you know how to stay out of hot water with the IRS. And the truth is, folks, nobody wants to be in trouble with the IRS.
Ralph Estep Jr. [00:18]
Well, welcome to our Tax Talk Thursday Show. I'm so glad you chose to join us. I'm coming to you from the Estep Farm in the Saggio Accounting Studio. Let me put on my podcaster hat and put down those overalls and the adding machine gets moved to the side. Let's get into some financial wisdom from a Christian perspective. As always, it's great to have you tuning in today.
Ralph Estep Jr. [00:39]
Tomorrow I'll be sharing the five main purposes of budgeting and why having a plan for your money is so important. Budgeting may seem restricting to some but done right, it's one of the most freeing things you can do with your finances. I'm going to unpack all of that tomorrow. So that's a show you don't want to miss.
Ralph Estep Jr. [00:56]
For today's Tax Talk Thursday, we're discussing common IRS penalties taxpayers face and how to avoid them. Getting hit with the penalties and interest charges amplifies the stress of an already unpleasant tax situation. My goal today is to bring awareness to the most frequent penalties so you can be proactive in steering clear of them.
Ralph Estep Jr. [01:20]
Before jumping in, let's ground our discussion in scripture. Our Bible verse today comes from the Book of Proverbs, Chapter 21, Verse 5 and it says this: "The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty." Well, that one cuts you, doesn't it? As in all areas of life, diligently planning ahead and exercising discipline with our finances helps prevent stressful situations down the road. When it comes to taxes, a little prevention goes a long way. I feel like it's something my grandmother used to tell me all the time.
Ralph Estep Jr. [01:57]
All right. Well, let's explore some of the most common penalties charged by the IRS along with some valuable tips to avoid them. I'll start the first one. This is dreaded by all procrastinators everywhere, and that's the "Failure to File" penalty. If you don't file your tax return by the deadline, you're going to face what's called a failure to file penalty. This penalty is generally 5%, you heard me right, of the unpaid taxes for each month or part of a month of tax return is late. If you file more than 60 days after the due date, the minimum penalty is $435 or a hundred percent of the unpaid tax, whichever is less.
Ralph Estep Jr. [02:38]
This can be a big penalty if you don't file on time. The key is to avoid late filing altogether, folks. I recommend filing for an extension if you know you can't make the original deadline. That gives you an additional six months without facing that failure to file penalty. Just be sure to pay as much as you can by the estimated filing date, that's April 15th, to avoid other penalties and interest charges.
Ralph Estep Jr. [03:02]
The next penalty up is "Failure to Pay" penalty. This one kind of goes alongside of that failure to file penalty. If you file your return on time, but you don't pay the full amount due, you're going to incur what's called a failure to pay penalty. This penalty also equates to a half a percent of your unpaid taxes for every month or part of a month that your bill remains outstanding after that April 15th or whatever the filing date is for that particular year. If both the failure to file and the failure to pay penalties apply in the same month, the amount of the penalty for failure to file for such a month is reduced by the amount of the penalty for failure to pay. So they do give you a little bit of a break there.
Ralph Estep Jr. [03:41]
The easiest way, and this is the truth, to avoid this penalty is to file an extension and pay as much as possible by that tax due date. If you can't pay at all, still pay something. This shows good faith and the IRS will be more understanding down the road. And the truth is many people are under the false impression that an extension gives you more time to pay, but there is no extension available for paying. I stress this. In fact, when we're asked to file an extension for clients, we have them sign a disclaimer that actually says this.
Ralph Estep Jr. [04:14]
So here are some options if you simply can't pay what you owe. The first thing you can do is apply for an IRS installment agreement. To ask them to allow you to make monthly payments. Now, you do need to understand that there are going to be penalties and they're going to be interest assessed, but it's going to keep you out of hot water with the IRS.
Ralph Estep Jr. [04:31]
Another thing to consider is an IRS offer in compromise where you settle for less than the amount you owe. And there's also a thing called "currently not collectible" status if you have little income or no assets. I've done a few shows on these topics, so I encourage you to check them out if you find yourself unable to pay. But here's the critical point: it is critical to communicate with the IRS instead of ignoring their notices. Don't put them in the drawer and forget about them. Unpaid taxes will lead to bank levies. It will lead to wage garnishments, and it will lead to property liens against what you owe.
Ralph Estep Jr. [05:05]
You've got to make sure you don't let it spiral out of control as Proverbs, Chapter 22, Verse 7 warns: "The borrower is a slave to the lender." You don't want to be a slave to the IRS, folks.
Ralph Estep Jr. [05:17]
Moving on to the next penalty and that's the "Underpayment" penalty. These penalties apply when you haven't paid enough in taxes throughout the year. Specifically, if you owe more than a thousand dollars when you file your return, you could incur an underpayment penalty.
Ralph Estep Jr. [05:31]
There are three main exceptions to this. The first one is this: if you owe less than a thousand dollars. The second one is if you paid at least 90% of the tax for the current year. And the third one, which we call "safe harbor," is if you paid a 100% of the tax shown on the last tax return you filed. Avoiding underpayment penalties boils down to proper tax planning. If you listen to this show, you know I talk about this all the time.
Ralph Estep Jr. [05:55]
The value is in tax planning. You got to review your withholdings and/or your estimated taxes to ensure you're on track to meet one of the exceptions above if you're going to owe money. If you do have extra income, like freelancing, maybe you've got investments. You've got to be making quarterly estimated pack tax payments to stay ahead throughout the year. I did a show a few weeks ago on those underpayment penalties. So again, I encourage you to check that one out.
Ralph Estep Jr. [06:22]
And the final penalty for our discussion today is what's called the "Accuracy-related" penalties. If the IRS finds errors in your tax return that they deem to show negligence, substantial understatement of tax or substantially overstating income, you may face Accuracy-related penalties. This penalty equates to 20% of the unpaid tax, it's a big one.
Ralph Estep Jr. [06:45]
So here are some ways to avoid this penalty. You've got to thoroughly document deductions, thoroughly document your income, and thoroughly document your credits. I highly advise you to hire a qualified tax preparer if you have any kind of complexities. And the final point here: don't take overly aggressive tax positions without having sound reason. So to sum this all up, the key themes are this: paying attention, proactively planning ahead, and communicating with tax authorities when needed.
Ralph Estep Jr. [07:16]
The Book of Psalms, Chapter 90, Verse 12 instructs us to "Number our days carefully, so that we may develop wisdom in our hearts." We can apply this principle to diligently managing our tax situation as well.
Ralph Estep Jr. [07:29]
To quickly recap, we discussed four common IRS penalties today. That was the "Failure to File" penalty, the "Failure to Pay" penalty, "Underpayment" penalties, and "Accuracy-related" penalties. And we also talk about ways of proactively avoiding them through proper planning. Compliance, making payment arrangements when needed, and clear communication with tax authorities. You don't want to forget about these things.
Ralph Estep Jr. [07:54]
Taking a diligent approach helps prevent penalties down the road. It's a great time to take advantage of tax planning opportunities throughout the year instead of waiting til April 14th and scrambling to file your return. You are going to be in trouble if you do that. And as always, you've got to carefully weigh risks before taking overly aggressive tax positions without strong legal backing. I have these discussions with my clients all the time. I will say to them: "This is a black area," "This is a white area," and this is a gray area." I give them guidance on how to handle those things so they don't take a mighty aggressive position that they can't back up.
Ralph Estep Jr. [08:32]
Well, that wraps up today's Tax Talk Thursday, episode of avoiding IRS penalties! At least the common ones. Please visit askralphpodcast.com to access all of our resources and join our email list. I highly encourage you to do that so you can receive notifications about new episodes. I'm also going to ask you to share this episode if you found it useful, especially with others who may be stressing about potential tax penalties. Knowledge is power, and preparation is key when it comes to managing those unpleasant tax surprises. And as I always say, stay financially savvy and God bless you.
