Tax season is something that stresses a lot of people out. And if you’re like many Americans, you might be thinking about your tax situation all year long. One wrong move could potentially trigger some hefty tax penalties. Taking the time to understand what landmines are lurking in common tax strategies can help you save a lot of money (and stress). Here are eight common tax moves that could cause serious penalties this year.
1. Filing Late Without an Extension
If you don’t file your tax return by the deadline and skip asking for an extension, the IRS slaps on a “failure-to-file” penalty. That’s 5% of your unpaid tax for each month it’s late, maxing out at 25%. Wait over 60 days? You’ll owe at least $525 or 100% of your tax (whichever’s less). So even if you can’t pay, file on time or file for an extension. Doing that saves the highest chunk of the penalty.
2. Paying Taxes Late—even After Filing
Even if you file on time, delays in payment trigger the “failure-to-pay” penalty. It’s 0.5% per month of unpaid tax, up to 25% total. This mounts quickly if you don’t set up an installment plan. And if the IRS sends a levy and you still don’t pay, that 0.5% monthly often continues . So submit whatever you can by April 15—and make a plan for the rest.
3. Underpaying Estimated Taxes
If you’re self-employed or have rental income, skipping accurate quarterly payments can cost you. The IRS charges underpayment penalties plus interest . Miss the mark by more than $1,000, and you’ll face fees. The fix? Calculate and submit estimated tax payments in April, June, Sept., and Jan. to avoid this pitfall .
4. Substantial Understatement of Income
Reporting income too low—or not paying enough tax—can trigger a 20% “accuracy-related” penalty on the underpaid portion. That applies if you understate tax by over 10% or $5,000. Careless deductions? Same rules. And if you value something incorrectly—like a charitable donation—you could face 30% on the excess . Bottom line: keep your numbers honest and well-supported, or face serious tax penalties.
5. Claiming Refunds Incorrectly
Did you ask for a refund you weren’t owed? That’s called an “erroneous claim” and can lead to a 20% penalty on the overpaid portion . The IRS isn’t messing around: they want accurate, supported claims—not wishful thinking. Always check your eligibility thoroughly, and save all documentation before filing.
6. Missing Retirement Distributions
Turned 73 and forgot to take your Required Minimum Distribution? You could owe 25% of the amount you didn’t withdraw. Missed it but corrected promptly with Form 5329? You might still owe a 10% penalty. Mark your calendar and schedule distributions to avoid the IRS hitting you hard.
7. Misreporting 1099 and Other Reporting Forms
Whether you file W?2s, 1099s, or other information returns, mistakes and tardiness can cost you. Each form mishandled can earn penalties—$60 to $340 typically, scaling up if late. Businesses filing for many contractors can see this add up fast. The best defense? File all information returns timely and error-free.
8. Failing to Deposit Employment Taxes
Employers must withhold and remit payroll taxes on schedule. Missed deposits bring automatic penalties: 2% if 1–5 days late, jumping to 10% after 15 days. Wage taxes? If you withhold and fail to pay them, penalties can equal 100% of the tax due . For small-business owners, this is non-negotiable—or risk personal and corporate liability.
Smart and Safe: How to Dodge Dangerous Tax Penalties
Tax avoidance isn’t just about saving—it’s about staying compliant. Understanding and avoiding these eight dangerous moves will keep you out of trouble and save you from enormous tax penalties this year. Remain proactive: file on time, pay what you owe—even if you need a plan—and track important dates like RMD deadlines. Keep clear records to support deductions and claims. Following these steps keeps IRS trouble at bay—and your wallet intact.
Have you ever faced a tax penalty or missed a deadline? How did you handle it? Share your stories (or ask questions) in the comments below!
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