With the changes introduced by the 2017 Tax Cuts and Jobs Act, also known as Tax Reform, there’s a lot of confusion this tax season. There are a few questions we’ve heard over and over: How does Tax Reform impact potential tax refunds? And, what happens if someone owes more than they thought they would? One of the most significant things tax payers should be aware of is that penalties for not filing a tax return or tax extension are higher than penalties for not paying taxes owed. Because of that, it’s important that taxpayers not miss a filing deadline if they owe taxes, even if they can’t pay their taxes on time. It’s better to file a tax return or an extension and pay as much as you can afford at that time, than to not file at all.
The Internal Revenue Service (IRS) has provided more information on their website about how penalties are calculated, but here are some basics. If someone files a tax return but does not pay taxes owed, a failure-to-pay penalty may be assessed. Simply, the penalty is 0.5% of the tax not paid by April 15th, up to a maximum amount of 25% of the unpaid taxes. There may also be interest charged on the outstanding balance. On the other hand, if the person files late, their potential minimum failure-to-file penalty is 5% of the unpaid taxes up to 100% of the unpaid taxes or $215, whichever amount is smaller. Again, interested may also be charged on the outstanding balance. To put numbers to it, if a client owes $100 in taxes, their failure-to-file penalty would be $5 per month, with a maximum penalty owed of $25, bringing the amount owed to $125 – $100 for taxes owed and $25 for the failure–to-pay penalty. In contrast, if someone files a late return, the minimum potential penalty is 100% of taxes owed, or in this case $100; the total owed is now at least $200 – $100 for taxes owed and $100 for the failure-to-pay penalty. The good news is that the IRS offers payment plans.
Another important thing to note is that taxpayers who paid at least 80% of their tax liabilities for Tax Year 2018 will not face IRS penalties. Typically fines are assessed if taxpayers don’t pay or cover at least 90% of their taxes owed during the given tax year through paycheck withholdings or quarterly tax estimate payments. In March the IRS announced they are providing additional expanded penalty relief to taxpayers this year and they lowered the threshold to 80%. This means the IRS is waiving the estimated tax penalty for any taxpayer who paid at least 80% of their total tax liability during the year. You can learn more about the IRS decision here.
While it won’t impact tax requirements for Tax Year 2018, the IRS is encouraging taxpayers to do a Paycheck Checkup. This can help people to avoid future situations where they might have too much or too little tax withheld from their paychecks.