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Obvious errors take you to heavy Tax Penalties
No one wants to end up in a situation where they owe tax money to the IRS. The IRS is the most effective collections agency in the world. No one wants the IRS after them. With that in mind, here are some common ways taxpayers find themselves in trouble with the IRS.
One of the most frequent errors in dealing with the IRS is failing to file a return. Everyone living in the United States and earning an income here, is subject to filing a tax return, if your income is above certain minimum thresholds. Many taxpayers mistakenly believe that, for some reason or another, they do not reach filing status. Failure to file, when so required, will attach penalties and interest to whatever taxes you owe. These penalties and interest can accrue over time to the point where they eclipse the initial tax liability. If you fail to file when required to do so, the IRS has the option of filing a return for you. You are then liable for any taxes the IRS says you owe on this return.
Filing a late return will cost you five percent in penalties per month, reaching a maximum of twenty-five percent. If you file your return on time, but don’t actually pay the tax, your penalty will be assessed at one half of a percent for every month that you failed to pay the taxes. Next, there is the accuracy related penalty. The Internal Revenue Service will hit you with this one when they believe that you underpaid your taxes because you disregarded or ignored tax regulations. They will also assess this penalty if you understated your tax liability. This penalty is twenty percent of what you owe.
If the Internal Revenue Service finds that you committed fraud in not paying your taxes, the fine is seventy-five percent plus the possibility of criminal prosecution.
Owners of businesses and the self-employed often find themselves in a tax jam because of estimated taxes. This particular group has to pay their taxes quarterly or even monthly based on their earnings and estimated taxes. Since they work for themselves, they are solely responsible for their tax liability. If you should be making estimated tax payments and fail to do so in the course of the year, you could be facing a very large tax liability when you file your return. Many first time business owners and those recently self-employed are not even aware of the need to file estimated tax payments. When starting out on your own, you should consult with a tax expert in order to determine what rights and obligations will be entailed in your new filing status.