Don’t Get Dinged: Simple Ways to Steer Clear of IRS Penalties

Why Staying Ahead Of IRS Penalties Can Save You Thousands

You can avoid IRS penalties by taking simple, proactive steps. The IRS charges penalties for late filing, late payment, underpayment, inaccurate returns, and bounced checks. Here’s how to steer clear:

Quick Ways to Avoid IRS Penalties:

1. File on time (even if you can’t pay in full)
2. Pay what you owe by the deadline (or set up a payment plan)
3. Make estimated tax payments if you’re self-employed or have income without withholding
4. Ensure your withholding is correct using the IRS Tax Withholding Estimator
5. Keep good records and double-check your return for accuracy
6. Request an extension if you need more time to file (but pay by the original deadline)

While there’s no penalty for filing late if you owe nothing, the consequences are steep if you do owe. The Failure to File penalty is 5% of unpaid tax per month (up to 25%), while the Failure to Pay penalty is 0.5% per month (up to 25%). Owing over $1,000 after withholding can also trigger an underpayment penalty.

The good news is that many penalties can be reduced or removed for reasonable cause (like a disaster or illness) or through First-Time Penalty Abatement for those with a clean compliance history. Acting quickly saves money and stress.

I’m Attorney Samuel Landis, Managing Partner at Segal, Cohen & Landis. For over 15 years, I’ve helped clients resolve complex tax disputes. My focus is on helping taxpayers avoid IRS penalties through proactive planning and securing relief when penalties arise.

Understanding The most Common IRS Penalties

Finding an IRS penalty notice in your mailbox is stressful. But these penalties aren’t random; they are the IRS’s way of encouraging compliance with tax laws and follow specific rules. Understanding how these penalties work is the first step to avoiding them.

The IRS assesses penalties for various reasons, including late filing, late payment, and inaccurate returns. Each error triggers a specific penalty with different rates.

Here are the five most common penalties:

Failure to File: Occurs when you miss the tax filing deadline. It’s a frequent and costly penalty.

Failure to Pay: Applies when you don’t pay your taxes by the due date, even if you filed on time.

Underpayment of Estimated Tax: Affects those who don’t pay enough tax throughout the year via withholding or estimated payments. This is common for the self-employed, freelancers, and those with investment income.

Accuracy-Related Penalty: Charged for mistakes that understate your tax liability, such as carelessness or a substantial understatement of income.

Dishonored Check Penalty: Assessed if you pay your taxes with a check that bounces.

Failure to File vs. Failure to Pay

These two penalties are often confused, but understanding their differences is key to saving money.

The Failure to File penalty is the more aggressive of the two. The IRS charges 5% of the unpaid tax for each month (or part of a month) that a return is late, up to a maximum of 25%. For returns due in 2024, there’s a minimum penalty of $485 if you’re more than 60 days late.

The Failure to Pay penalty is less severe but still adds up. It’s 0.5% of the unpaid tax for each month the tax remains unpaid, also capping at 25%.

If you fail to file and pay in the same month, the IRS doesn’t charge a full 5.5%. Instead, the Failure to File penalty is reduced by the Failure to Pay penalty, resulting in a combined 5% per month.

Here’s how these two stack up side by side:

The lesson is clear: even if you can’t pay, always file on time. Filing protects you from the much steeper Failure to File penalty.

Underpayment and Accuracy-Related Penalties

The Underpayment of Estimated Tax Penalty often surprises people. The U.S. has a “pay-as-you-go” system, meaning the IRS expects you to pay taxes throughout the year. If you owe $1,000 or more when you file, you could face this penalty. This often affects self-employed individuals, gig workers, and those with income not subject to withholding.

Accuracy-Related Penalties come into play when there are problems with your return’s accuracy. These penalties are typically 20% of the underpayment due to the error, but can jump to 40% in serious cases.

Triggers include substantial understatement of tax, negligence or disregard of rules, and gross valuation misstatements (significantly overstating property value to lower your tax bill).

To avoid these penalties, be thorough, keep good records, and ask for professional help when unsure. It’s cheaper than paying penalties later.

Proactive Strategies To avoid IRS Penalties

Most IRS penalties are preventable. The key is to understand IRS expectations and act before problems arise. A little effort now can save you thousands. Avoiding penalties relies on three habits: filing on time, paying on time, and keeping good records.

Master Your Filing and Payment Deadlines

Meeting deadlines is the simplest way to avoid IRS penalties. The annual deadline to file federal income tax returns and pay taxes owed is April 15th (or the next business day).

If you’re not ready by Tax Day, file Form 4868 for an automatic extension to October 15th. This saves you from the steep Failure to File penalty.

Crucially, an extension to file is not an extension to pay. Your tax payment is still due by the original April deadline. The IRS gives you more time for paperwork, not for payment.

If you can’t pay your full tax bill by April 15th, file anyway and pay as much as you can. By filing on time, you avoid the 5% per month Failure to File penalty and will only face the much smaller 0.5% per month Failure to Pay penalty.

If you need more time to pay, an IRS installment agreement allows monthly payments for up to 72 months. While penalties and interest still apply, a payment plan reduces future penalties and is better than ignoring the debt.

Conquer the ‘Pay-As-You-Go’ System to Avoid IRS Penalties for Underpayment

The U.S. tax system is “pay-as-you-go,” meaning you must pay tax as you earn income. Mastering this system is crucial to avoid IRS penalties for underpayment.

For employees, this happens via withholding based on your Form W-4. You should adjust your W-4 after major life events like marriage, a new baby, or starting a side business. Use the IRS’s Tax Withholding Estimator tool to ensure you’re withholding the correct amount.

For income not subject to withholding (self-employment, freelance work, rental income, etc.), you must make estimated tax payments. Use Form 1040-ES to calculate what to pay each quarter.

The four quarterly due dates are April 15th, June 15th, September 15th, and January 15th of the following year. Set calendar reminders to avoid missing these dates.

The Safe Harbor Rules for Estimated Taxes

Estimating annual income can be difficult. Fortunately, the IRS provides “safe harbor” rules to help you avoid IRS penalties for underpayment, even with imperfect estimates.

You generally won’t face a penalty if you meet one of these conditions:

• Pay 90% of your current year’s tax through withholding and estimated payments.
• Pay 100% of the tax shown on your prior year’s return (if it covered 12 months). This is often easier as the number is already known.

There’s an exception: if your prior year’s adjusted gross income (AGI) was over $150,000 ($75,000 if married filing separately), the safe harbor increases to 110% of your prior year’s tax.

If you owe less than $1,000 after withholding and credits, you typically won’t face a penalty.

For those with fluctuating income (e.g., seasonal businesses, commissions), the Annualized Income Method allows you to base payments on when income is earned. While more complex, it can save you money if your income is uneven. See Form 2210 and its instructions for details.

To avoid other penalties, ensure you have sufficient funds before paying the IRS, double-check all figures for accuracy, and timely file information returns like W-2s and 1099s.

What To Do If You Receive A Penalty Notice

Receiving a penalty notice from the IRS is stressful, but don’t panic. Dealing with it promptly and calmly is the best path forward.

First, verify the information in the notice and understand the reason for the penalty. Read the IRS letter carefully. Mistakes can happen, so if something looks incorrect, follow the notice’s instructions to resolve it.

Acting promptly is crucial. Ignoring a notice won’t make it disappear; it will grow as the IRS charges interest on penalties until they’re paid in full. The sooner you address it, the less you’ll pay. If a penalty is reduced or removed, the related interest is automatically adjusted.

Requesting Penalty Relief: Abatement Options

You may qualify for penalty relief if you tried to comply with tax laws but couldn’t due to circumstances beyond your control.

First-Time Penalty Abatement (FTA) is an excellent option if you have a good compliance history. To qualify, you must have filed all returns, paid (or arranged to pay) your tax, and have no penalties for the prior three tax years. FTA applies to Failure to File, Failure to Pay, and Failure to Deposit penalties. It’s a way to avoid IRS penalties from a single mistake.

If you don’t qualify for FTA, Reasonable Cause may provide relief. This applies if you exercised ordinary business care but were still unable to meet your obligations. Valid reasons include:

• Natural disaster (fire, flood, etc.)
• Serious illness or incapacitation (yours or an immediate family member’s)
• Death of an immediate family member
• Unavoidable absence or inability to obtain necessary records

A successful reasonable cause claim requires documentation. Gather evidence like medical records, death certificates, or insurance claims to support your case and show why you couldn’t comply.

The Process for Appealing a Penalty

If you believe you have grounds for relief, you have clear options.

Calling the IRS at the number on your notice is often the quickest route for Failure to File, Failure to Pay, and Failure to Deposit penalties.

For other penalties or if a call is unsuccessful, submit a written request using Form 843, Claim for Refund and Request for Abatement. Clearly explain your reasons and attach supporting documents.

If your request is denied, you can appeal the decision. The denial notice will explain how to write a formal letter to the IRS Office of Appeals.

If you’re struggling, help is available. The Taxpayer Advocate Service is an independent organization within the IRS that assists taxpayers. For complex cases, professional tax law assistance is essential. At Segal, Cohen & Landis, we have over 33 years of experience helping clients avoid IRS penalties and resolve them when they occur.

Frequently Asked Questions About Avoiding IRS Penalties

Here are answers to the most common questions we hear from clients about IRS penalties.

What’s more severe, the Failure to File or Failure to Pay penalty?

The Failure to File penalty is much more severe. It’s 5% of your unpaid tax per month, compared to the Failure to Pay penalty’s 0.5% rate. While both cap at 25%, the Failure to File penalty accumulates ten times faster. If both apply, the combined rate is capped at 5% per month. This is why it’s critical to file on time, even if you can’t pay the full amount.

Can I get a penalty waived if it’s my first mistake?

Yes, the IRS offers First-Time Penalty Abatement (FTA) for taxpayers with a clean compliance history. If you’ve filed all required returns, paid or arranged to pay your tax, and had no penalties for the three prior years, you may qualify for a waiver on Failure to File, Failure to Pay, or Failure to Deposit penalties. It’s a valuable option for an isolated mistake and a straightforward way to avoid IRS penalties after they’ve been assessed.

If I can’t pay my taxes, should I still file my return?

Yes, absolutely. Always file your return on time, even if you can’t pay. The Failure to File penalty is ten times higher than the Failure to Pay penalty, so not filing is a costly mistake. File by the deadline, pay what you can, and immediately contact the IRS to set up a payment plan. This proactive approach minimizes penalties and shows the IRS you’re making a good-faith effort to comply, which can open up options for relief.

Conclusion

Taking control of your tax situation is manageable. The IRS’s goal is compliance, not punishment. By understanding how penalties work and taking proactive steps—like filing on time and keeping up with estimated payments—you can avoid IRS penalties, saving money and stress. If you do receive a penalty notice, options like First-Time Penalty Abatement and reasonable cause relief are available.

The most important step is to act quickly on any IRS notice. Ignoring it allows interest to accumulate, making the problem worse. A prompt response, proper documentation, and understanding your rights can lead to a much better outcome.

At Segal, Cohen & Landis, we’ve spent over 33 years helping more than 25,000 clients in Los Angeles and beyond steer these situations. From simple mistakes to complex disputes, we guide clients with clarity and compassion. You don’t have to face tax issues alone.

Whether you’re facing a deadline, penalties, or back taxes, our team is here to help. We specialize in resolving federal and state tax issues with effective, customized solutions.

If you’re ready to take control of your tax situation, reach out to us today. We can help you understand your rights, negotiate with the IRS, and explore solutions like an Offer in Compromise to settle your tax debt for less than you owe.

You’ve taken the first step by learning how to avoid IRS penalties. Now let us help you take the next step toward lasting peace of mind.