Underpayment of Estimated Taxes and Withholding Penalty – The United States income tax system is a pay-as-you-earn tax system, which means that taxpayers are required to pay their tax liability as they receive income during the year through withholding or by making estimated tax payments. If a taxpayer owes more than $1,000 when filing their return for the year, the IRS will assess the underpayment of estimated tax penalty, which is currently 3% of the underpayment. There are “safe harbor” payments that can protect you from this penalty, which include payments in the following amounts: 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay (508) 376-8811% of the current liability or 100% of the prior year’s liability.

Required Minimum Distribution (RMD) Penalty - To prevent an individual from investing in tax-deferred retirement plans, including traditional IRAs, but never withdrawing funds from the plans (which would mean the government wouldn’t ever collect taxes on the distribution), retirees must take an RMD each year after reaching the mandatory RMD age. The mandatory distribution age has recently changed from 70½ for years before 2020 to 72 in 2020 and later years. Failing to take the correct minimum distribution (also known as excess accumulation) results in a penalty of 50% of the difference of what should have been withdrawn and what was actually withdrawn.

However, the IRS is very liberal in general and will abate the penalty in most situations.

Late Filing Penalty – If a return is filed after the due date, including extensions, a late filing penalty of 4.5% per month (maximum 22.5%) applies. The normal due date for returns is April 15 of the subsequent year. Because of COVID-19, the due date for 2019 returns was extended to July 15, 2020, and the penalty for filing a late (508) 376-8811 return does not begin until after July 15, 2020. If you have not filed your 2019 return and did not file an extension by July 15, 2020, you are encouraged to do so as soon as possible to minimize penalties.

If a return is over 60 days late, the minimum penalty for failure to file is the lesser of $435 or 100% of the tax shown on the return. While the obvious way to avoid a late filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect.

Late Paying Penalty – When the tax owed on a return is paid after the unextended due date of the tax return (July 15 for 2019 returns filed in 2020), the taxpayer is subject to a penalty of 1/2% per month (maximum 25%) on the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return; many fail to realize that the extension does not include an extension to pay. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension.

Negligence – When underpayment is due to negligence on the part of the taxpayer or there are errors in tax valuations, a penalty of 20% of the tax underpayment is charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions.

Fraud – This penalty is 75% of the tax unpaid due to fraud.

Dishonored Check – The penalty for dishonored checks of over $1,250 is 2% of the check amount. If the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late payment charges, but the penalty rate is lower if you are on a payment plan.

Missing ID Number – A penalty of $50 for each missing number applies when a taxpayer doesn’t provide a required Social Security number (SSN) for themselves, a dependent or another person on their tax return. It is also charged when the taxpayer doesn’t provide their SSN to another person or entity when required.

Early Withdrawal Penalty – If a taxpayer is under age (508) 376-8811 and withdraws assets (money or other property) from a qualified retirement plan, including traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as the early withdrawal penalty. This tax is 10% of the part of the distribution that the taxpayer was required to include in gross income for the year of the distribution.

Failure to Report Tips - A penalty is charged if a taxpayer didn’t report tips to their employer. It equals 50% of the Social Security tax on the unreported tips.

Reporting Foreign Accounts and Assets – There are numerous and substantial penalties for failure to report a variety of foreign accounts and assets, and some of the penalties are even draconian. Please contact this office if you have a foreign financial account, foreign trusts, ownership in a foreign corporation, received foreign gifts, etc.

Excessive Claim Penalty - If a claim for refund or credit for income tax is made for an excessive amount, the person making the claim is liable for a penalty equal to 20% of the excessive amount. The excessive amount is the amount by which the claim for any tax year exceeds the amount of the claim allowable for that tax year.

The penalty doesn’t apply if it is shown that the claim for the excessive amount is made with reasonable cause. The penalty also does not apply if any portion of the excessive amount or credit is subject to an accuracy-related penalty.

Frivolous Return - In addition to any other penalties, the law imposes a penalty of $5,000 for filing a frivolous return—one that does not contain information needed to establish the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or displays a desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs. Under limited circumstances, the IRS may reduce the penalty from $5,000 to $500.

Failure to File Information Returns – A taxpayer who, without reasonable cause, fails to file required information return in the manner the law specifies or by the proper deadline, fails to include all of the information required or includes incorrect information is subject to a penalty of $280 for each return required to be filed during 2020. The penalty is reduced to $50 if the failure is corrected within 30 days of the due date and $110 if corrected by August 1.

The views expressed herein represent the opinions of MOK Financial Planning & Tax Inc., and are not intended as a forecast or guarantee of future results. This information should not be considered a solicitation or an offer to provide any MOK Financial Planning & Tax Inc. service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. The information contained in this presentation is obtained from sources believed to be accurate, reliable and current as of the presentation date. MOK Financial Planning & Tax Inc. will not undertake to supplement, update or revise such information at a later date. The information contained herein is for informational purposes only and is not intended to be a recommendation, investment advice, forecast or guarantee of future results.

MOK Financial Planning & Tax, Inc. is a registered investment adviser based in Millis, Massachusetts. We are organized as a corporation under the laws of the State of Massachusetts and have been providing investment advisory services since September 2017.