It’s no secret that to many American taxpayers, the Internal Revenue Service indeed has a menacing reputation.
There are plenty of stories in which the IRS takes the initiative to garnish wages if you owe the agency money. In cases with more substantial underpayments, the IRS can issue a tax lien or levy and seize property such as financial accounts, automobiles, and homes.
And more often than not, they will tack on penalties and interest whenever they can—which can add up to thousands or even tens of thousands of dollars. So, the advice is to never ever ignore mail that you might receive from the IRS.
However, despite such nightmarish scenarios, know that there are some important steps to take if you don’t want to be saddled with extra payments to the IRS.
First, always file your tax return on time. If you fail to do so (generally April 15, but this year it has been delayed by a month), be aware that the penalty is 5 percent of the unpaid tax due. That penalty is charged on a monthly basis for up to five months, and if the return is filed more than sixty days late, the minimum penalty is $435.
Next is always pay the tax that is due in a timely fashion. If you filed a return but did not pay the tax, the penalty is 0.5 percent of the tax not paid levied every month up to a maximum penalty of 25 percent.
However, keep in mind that the penalty potentially can be lowered to 0.25 percent if you set up installment payments. On the other hand, the penalty can be elevated to 1 percent if it remains unpaid after an IRS notice to levy property.
For many self-employed workers out there or those who aren’t withholding enough, be on notice that if your federal tax due will be more than $1,000, you must pay at least 90 percent of your expected tax due for this year or 100 percent of your tax due for last year.
If you do not take the necessary action to withhold enough from wages, pensions, and Social Security or make sufficient estimated quarterly payments, you could owe an underpayment penalty based on how much you underpaid.
So, you think you did everything right on your return—but what happens if you get audited? Know that only about one in every two hundred fifty tax returns is subject to an audit. In most cases, the IRS will handle such matters by sending you a tax notice by mail, allowing you to respond to it and pay the necessary tax and interest due.
If you must face an actual audit, additional penalties will apply if the IRS determines that the mistakes found on your return were due to negligence or fraud. For negligence, the penalty is 5 percent to 20 percent of the additional tax due, while for fraud, the penalty can reach 75 percent of the tax owed.
Ethen Kim Lieser is a Minneapolis-based Science and Tech Editor who has held posts at Google, The Korea Herald, Lincoln Journal Star, AsianWeek, and Arirang TV. Follow or contact him on LinkedIn.