Tax Season: Understand the most common penalties and learn how to avoid them.

Tax Season: Understand the most common penalties and learn how to avoid them.

Here are four common tax penalties the IRS charges taxpayers, as well as tips for avoiding them…

Failure to File

This year, individual tax returns are due on April 18, 2023. If you need more time, you can apply for an extension, which gives you until October 15 to file your return. If you do not apply for an extension or miss the extended due date, the IRS will charge a penalty for failure to file.

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This tax penalty is 5% of unpaid tax for each month or part of a month that your return is late. However, it is limited to 25% (5 months) of your balance. If your tax return is more than 60 days late, a minimal penalty will apply. The minimum fine is $435 or 100% of tax due, whichever is less, for returns due after 01/01/2020.

To avoid the penalty, be sure to file your tax return by the due date (or extended due date), even if you cannot pay the balance due. You have a little more leeway if you’re expecting a refund. In this case, the IRS will not charge a penalty for not filing if you file your tax return late. However, you could lose your refund if you don’t file your return within three years of the original due date.

Failure to Pay

Whether you file your tax return on time or apply for an extension, the IRS requires that you pay the tax due by the filing deadline. If you don’t pay what you owe by that date, the IRS will charge you a penalty for failure to pay.

This tax penalty is 0.5% of the tax due per month, but it is also capped at 25% of the tax due. If you set up an IRS installment agreement, the IRS will reduce your failure to pay penalty to 0.25% of the tax due while the installment agreement is in effect.

Both the failure to file and the failure to pay penalty are charged for an entire month, even if you pay the outstanding balance before the end of the month. When both fines apply to the same month, the failure to file fine is decreased by the amount of the failure to pay fine, so the maximum combined fine for failure to file and failure to pay is 5% for any given month.  

To avoid or at least minimize paying fines, pay the tax in full by the deadline, even if you request an extension. If you owe more than you can pay, pay as much as you can on time and pay the rest as soon as you can.

Estimated Tax Penalty

The IRS has a “pay-as-you-go” system, which means you must pay taxes throughout the year as you earn or receive income, rather than sending a large sum to the IRS at the end of the year. 

If you owe more than $1,000 when calculating your taxes, you could be subject to a penalty. To avoid this, you must make payments throughout the year through withholding taxes on your paycheck or estimated quarterly payments, or both.

The IRS calculates this penalty by calculating how much you should have paid each quarter and multiplying the difference between what you paid and what you should have paid by the effective interest rate for that period. This means you can have a penalty in one quarter but not the others.

To avoid or minimize penalties for non-payment of estimated tax, adjust your withholding tax from your paycheck or estimate your taxes and make quarterly estimated payments. These quarterly estimates are typically due on:

  • April 15th
  • June 15th
  • September 15th
  • January 15th

Please note that if one or more of these dates falls on a weekend or holiday, the deadline will be postponed to the next business day.

The IRS also offers two “safe harbor” methods for determining whether you are subject to a penalty. If you meet one of these “safe harbor” amounts, the IRS will not charge a penalty for non-payment of estimated tax, even if you owe more than $1,000 at the end of the year.


The requirements are that you pay:

90% of the tax you owe for the current year. Estimate what you owe and pay at least 90% of that amount in four equal installments or through withholding tax.

100% (or 110%) of last year’s tax bill. Pay 100% of the tax shown on your prior year tax return before applying estimated payments, withholdings, or refundable tax credits. If your adjusted gross income is more than $150,000 (or $75,000 if you’re married and filing a separate tax return from your spouse), the safe harbor is 110% of the prior year’s tax.

Bounced Check

If you write a check to cover your tax bill and don’t have enough money in your bank account to cover it, your bank can dishonor or “bounce” the check. The IRS charges a bounced check penalty of 2% of the check amount, unless it is less than $1,250. In that case, the fine is $25 or the amount of the check, whichever is less.

To avoid a bounced check penalty, make sure you have funds in your account to cover your payment before mailing a check.