5 tax penalties you should knowTax Day is looming, which means it’s time to get your paperwork together and crunch some numbers if you haven’t already. You’ll want plenty of time to make sure things are right, because with taxes, mistakes you make can result in more than just inconvenience. Do something wrong and you could be stuck with hefty tax penalties, making the often-unpleasant experience of paying your taxes even worse. To see how you can avoid the wrath of the IRS, and how much you stand to lose if you mess up, keep reading.

Note that, in addition to tax penalties, the IRS charges daily interest on any taxes you haven’t paid after your due date. Keep this in mind if you’re trying to calculate how much a late tax payment will cost you.

Failure to file

Forgetting to file your taxes by the return due date may seem like a simple mistake, but it’s one that carries some of the harsher tax penalties in the U.S. For every month you file your taxes late, you must pay a fee equal to 5% of the remaining taxes you owe, up to a 25% maximum penalty. There are no partial fees, so if you file your taxes even one day late, you’re required to pay the penalty for the whole month. Additionally, if you file your return more than 60 days after your due date, your penalty gains a minimum equal to $205 or 100% of your unpaid tax bill, whichever amount is smaller. If you don’t think you’ll be able to complete your tax return in time for this year’s April 17 deadline, you can try to request an extension from the IRS, and if they accept, you’ll have until Oct. 15 to get your taxes done. However, if you’re thinking of trying to file for an extension so you can procrastinate on your taxes, bite the bullet and just get them done. Not only will you receive any refund you’re owed sooner, but filing as early as you can helps you combat tax identity theft.

Failure to pay

The penalty for failing to pay is similar to the penalty for failing to file, only not as expensive. Not paying your tax bill in full by your due date results in a penalty equal to 0.5% of the tax you still owe per month, up to a total penalty of 25% of your unpaid taxes, and like the failure to file penalty there are no partial fees. The failure to pay penalty also extends to money you owe that isn’t listed on your original return. If the IRS calls you or mails you a letter saying you owe them money, you have 21 business days to pay that amount (or 10 business days if the amount you owe is above $100,000) without incurring the failure to pay penalty. Just be sure that the message is really from the IRS and it’s not a phishing scam, as sometimes scammers will pretend to be the IRS and demand you pay them immediately while threatening you with arrest.

For people who are facing a tax bill that they can’t afford to pay, you should still at least file your taxes, as doing so will save you from the much larger failure to file penalty. You can even try to negotiate a payment plan with the IRS so you can pay your owed taxes in installments, which will reduce your failure to pay penalty to 0.25% per month. Note that if you both file late and pay late, the maximum amount the IRS can charge you per month is 5% of your unpaid taxes, so you won’t have to pay both tax penalties at the same time.

If you just want to rid yourself of the IRS, you may want to pay your tax bill with a credit card. Our guide to paying the IRS with a credit card can help you decide if this is the right option for you.

Failure to pay proper estimated tax

Even though we have a big tax season every year, the IRS collects most of your income taxes as you earn money, either through withholding money from your paychecks or requiring quarterly estimated tax payments. While you may think that you can underpay throughout the tax year and then make up the deficit with a big payment at the end, doing so runs the risk of incurring a penalty. If, at the end of the tax year, you owe more than $1,000 in taxes, or if you’ve paid less than 90% of your total taxes (or 100% of the taxes shown on your return for the previous year, whichever number is smaller), you may have to pay a penalty for estimated tax underpayment. Your underpayment penalty will vary depending on how much money you underpaid, as well as how early in the year you sent the IRS money to make up the underpayment, and can be calculated using IRS Form 2210.

Dishonored form of payment

Cutting bad checks isn’t a good thing to do, but it’s particularly bad when dealing with the IRS. Not only could it delay a payment and put you in danger of getting slapped with a failure to pay penalty, it also carries its own penalty. Dishonored payments of $1,250 or more incur a penalty equal to 2% of the payment amount, and for dishonored payments under $1,250, the penalty equals the amount of the payment or $25, whichever is less. The good news, though, is that if you get this penalty, you can send a request to the IRS in writing to remove it if you explain why the payment was dishonored. These requests don’t work all the time, but it at least gives you a chance to avoid having to pay extra money.

Forfeiture of tax refund

While most tax penalties heap extra fees onto people, this one withholds money you would normally get. Due to people not filing their taxes for multiple years, the IRS is holding onto about $1 billion in unclaimed tax refunds. They don’t keep that money set aside forever, though, and if someone goes three years without claiming a tax refund, the IRS will void it and keep the money for the U.S. Department of the Treasury. If you haven’t filed your taxes for the past several years (e.g., if you’re if you’re a teenager with a part-time job), filing this year can let you claim your old tax refunds before they vanish. Be aware that, if you do claim old refunds, the IRS will apply that money to any amounts you owe on your federal and state taxes before they give you any of it. Also, if you have levies on your taxes for some reason, such as federal debts or unpaid child support, your refund will go to paying those off before it reaches your pocket.

If you’re worried about avoiding tax penalties, you may want to consider using an online tax preparation service to give you some extra support, or go to an accountant if your tax situation is too complicated for you to understand. To learn more about staying out of trouble during tax season, read our tax prep blog.