3 tax penalties you don't want to face

Colin Lalley 1600


Colin Lalley

Colin Lalley

Insurance Expert

Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness.

Published April 11, 2016|7 min read

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You have a lot of stress during tax season. How much will you owe? Are you getting a refund? Do you file yourself or find a professional? What happens if you get audited?

Money causes many people stress as it is, and that only grows when you’re dealing with the government on top of that. And make no mistake – if you mess up on your taxes, the IRS can come after you with some punishments.

That’s why it’s helpful to know why and how they’ll come after you, mainly so you can avoid the penalties in the first place.

There are three main ways the IRS gets theirs during tax season: fees, taking your return out of your hands, and jail time.


The most common punishment for not paying your taxes is having to pay penalty fees. This isn’t anything new: if you don’t pay your credit card bill by the payment deadline, you may have to pay an extra fee, for example.

It’s important to note that there’s a difference between tax negligence and fraud. It essentially comes down to intent. Did you mean to not pay, or did you accidentally mess something up? Depending on where the IRS finds fault, it can make a big difference in how much you end up paying.

Late fees

You’ll pay the price if you’re late on either filing or payment.

Late filingLate filing is pretty much what it sounds like: you don’t file your taxes by Tax Day, which is April 15 (barring tax day falling on a holiday/weekend).

A failure-to-file penalty will cost you an additional 5% of the tax you owe every month you don’t file, up to 25%. However, if you file late because of fraud, the penalty is 15% each month up to 75%. Like I said, there can be a big (and costly!) difference between negligence and fraud.

Late paymentIf you’ve done your taxes before, you know there’s two parts two it. First, you have to file all of the right forms by Tax Day. Then you have to actually pay whatever you owe. If you do the first part but don’t follow through with payment, you can get hit with penalties.

The fee for late payment is 0.5% each month up to 25%. If you apply for an installment plan, you can get that penalty lowered to 0.25%, so you won’t owe quite as much while you’re working to pay it off. However, it can also increase to 1% a month if you keep putting off payment and receive a final notice of intent to levy, at which point the IRS will also begin to "garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property."

InterestRemember the credit card analogy from earlier, where I compared tax penalties to fees on late credit card payments? Well, it’s a little more confusing than that, because when it comes to taxes, you need to pay a penalty and interest on late payments.

The IRS’ interest rates currently sit at 4%, and while they do adjust them occasionally, it’s not very often. You’ll have to keep both the penalty and interest rate in mind when calculating what your ultimate tax bill will be.

How to avoid tax feesDon’t want to pay all of these additional fees? The simplest way is to file and pay your tax on time. I know, it’s a pretty radical idea, but it’s been shown to work.

But let’s say you can’t/don’t/won’t do that. As you can see from the previous sections, filing late carries a much higher penalty than paying late. The least you should do is file on time. There are ways you can pay your taxes over time with the smaller penalty, which will give you a little less to worry about.

You can attempt to avoid a late payment penalty if you file for an extension and pay at least 90% of your owed tax. That can buy you a little time, as long as you make sure you get it all paid out by the extension due date.

The IRS notes that "you will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time." What kind of reasons will they accept? Things like natural disasters, incapacitation, or inability to gain records. A "lack of funds" isn’t an excuse, but the reason for the lack of funds might be considered acceptable.

It’s nice to know they take extenuating circumstances into account, and it shows that you should make every good effort to file and pay on time.

You can also accrue fees if you make mistakes on your return that alter the amount of money you pay. This usually takes the form of underpayment – where you pay, just not as much as you were actually supposed to.

The penalty for underpayment in the case of negligence is paying back the rest of what you owe plus an additional 20% on top of that. For fraudulent underpayment – where you did it on purpose – it can be as high as 75%. Depending on the circumstances and if the amount of underpayment is small enough, there’s a chance you won’t have to pay a penalty.

You can also get hit with a penalty for erroneously claiming a credit that you weren’t entitled to. The fee is 20% of the credit amount and, obviously, you won’t get that credit deducted from your final bill.

Failure to provide a Social Security Number

Finally – and this is an odd one – you can get assessed a fee if you fail to provide your Social Security Number anywhere it’s required on your return. It’ll cost you $50 for every instance, which can add up quickly.

Losing deductions and refunds

Sometimes the penalty you’ll be faced with is the loss of control over your return (which you have little of anyway) thanks to the IRS filing a substitute tax return, meaning you could lose out on valuable deductions and may not even get your refund.

This type of penalty isn’t in the same sense that we’ve been talking about it – you’re not being fined additional money, you’re just not getting back what you’re owed – but it can be just as painful.

Substitute tax return

Eventually, the IRS may get fed up with you not paying your taxes and they’ll take matters into their own hands with a substitute tax return, or SRF.

That’s great! Wow, who knew, all you had to do is not do your taxes and the IRS will just do it for you! You should do this every year, right?

No. That’s an extremely incorrect takeaway from this.First of all, all of those fees we talked about earlier – the penalties and interest – don’t just magically go away. The IRS factors them into the SRF.

Then, as if they’re kicking you when you’re down, the IRS will only include any standard deductions you qualify for. They won’t include additional deductions or credits that we all love including to lower our tax bill. That means they’re basing the tax on a higher income than you would if you were doing it yourself.

Forfeited refund

Let’s be honest, the only good thing about paying taxes is getting a refund. (And, y’know, schools and firefighters and working infrastructure and whatever.) The last thing you want is to miss out on your refund, right?

Well, you better act fast. Or at least within three years. That’s how long you have to claim your refund. If you don’t get it by then, it becomes a very kind donation to Uncle Sam (and not one you can write off on next year’s taxes).


"Man, all of this money taken away from me is the worst thing that could happen!" you think.

Wrong, because you can also go to jail, which is almost certainly worse.

Now don’t get me wrong, jail time is reserved for the worst case scenarios. Tax evasion, willfully not filing or paying taxes, fraud, and identity theft are surefire ways to land you behind bars. For most people, fines will be all they see and that will act enough as a deterrent.

For the more unscrupulous among us, though, there are harsher penalties if you’re willing to take the risk.

As you can see, it can be costly to get hit with penalties by the IRS. The one surefire way to minimize the chances of paying extra is to file on time, pay on time, and do your best to make sure all the information you provide is correct.