The tax
system in the United States is often referred to as a
voluntary system. It isn’t, which brings us to the IRS
and Penalties.
IRS and
Penalties
The tax code
is designed to encourage a certain type of behavior.
That’s right. It is used to modify the things you do in
life. For instance, homeownership is encouraged through
the mortgage interest tax deduction. By giving you a
break, the government is trying to push you to buy a
home, which helps create wealth in the country and
solidify the middle class. Unfortunately, the
government in the form of the IRS gets a bit testy if
you fail to pay your taxes. To modify your tardy
behavior, the government motivates you with penalties.
Ah, it is truly a brave new world!
Undoubtedly, April 15th is the key
day when it comes to filing tax returns and paying all
taxes due. Ideally, you should’ve been paying
throughout the year, but many don’t. If you fail to
meet this deadline, penalties start incurring:
If you fail to file a tax return, the
penalty is five percent a month for the delinquency up
to five months. In a worse case scenario, you would pay
a 25 percent penalty on the tax you owe. For instance,
you owe $10,000 and don’t file until December 15th.
Your penalty will be $2,500.
Fail
to actually pay the tax due and you are going to be hit
with an interest penalty. The rate varies year to year,
but is typically between 9 and 10 percent of the amount
of tax you owe.
Filing and
paying your taxes late has other consequences. Many
people moan and groan about their tax bill, but don’t
do anything about it. Alternatively, they pursue highly
dubious tax schemes that ultimately get them in a lot
of trouble. There is no need for this!
The best way to lower your tax bill
is to plan ahead. This means sitting down with a
proactive tax professional at the beginning of the tax
year. Your current financial situation should be mapped
out as well as expectations for the coming year. The
tax professional will then create a plan to legally
avoid a chunk of your tax bill. If you are always
filing late, you miss out on this opportunity and may
be paying as much as 50 percent more than you need to.
Does that make sense?