The U.S. has a saying that goes: “In life, you can’t avoid taxes and death,” highlighting the power of the Internal Revenue Service (IRS) in tax collection. Accountant Wendy Liu explains the various situations that can lead to fines imposed by the IRS and ways to avoid or seek reduction in penalties.
Many taxpayers incur penalties for late filing. Liu warns that if taxpayers fail to submit their tax returns after the deadline (individual tax filing deadline is around April 15th each year), the IRS will impose a “Failure-to-File Penalty,” charging 5% of the unpaid tax amount for each month overdue, up to a maximum of 25%. If taxes are filed but the payment is delayed, a “Failure-to-Pay Penalty” will be imposed, generally based on the amount of unpaid taxes with additional interest, charging 0.5% of the unpaid taxes per month and potentially reaching 25%. When both filing and payment penalties apply simultaneously, the total penalty is capped at 5% to 25%.
Insufficient prepayment or withholding of taxes to cover the annual tax liability may result in an “Underpayment Penalty.” This penalty applies when 90% of the current year’s taxes or 100% of the previous year’s taxes are not paid, often affecting self-employed individuals or those with fluctuating incomes. In cases where a tax payment check of $1,250 or more bounces or is returned due to insufficient funds, a penalty of $25 or 2% of the check amount, whichever is lower, will be imposed.
Liu mentions that reporting inflated income or claiming false deductions or exemptions could lead to punitive fines or even criminal investigations. Failure to report overseas income, bank accounts, or assets to the IRS, such as not filing FBAR (Foreign Bank Account Report) or Form 8938, can also result in fines.
She also reminds that gifts exceeding a certain amount are taxable. April 15th is the deadline for individual income tax filing and Form 3520 reporting for foreign gifts. Failure to accurately and timely file Form 3520 can lead to fines starting at $10,000, up to 35% of the gift amount, with an extension until June 15th for individuals outside the U.S. or in foreign military service.
Many taxpayers feel confused and panicked when faced with IRS penalties. Liu emphasizes that avoiding these penalties boils down to filing on time and paying taxes honestly. When unable to pay the full tax amount, submitting the tax return first can help avoid the “Failure-to-File Penalty.” Self-employed individuals, investment earners, or those with untaxed income should estimate their annual tax liability and make quarterly prepayments on dates such as April, June, September, and January 15th of the following year.
All taxable income must be reported to the IRS, including wages, bonuses, investment returns, rental income, self-employment income, etc. Any overseas income or assets must be reported as required. Employees should regularly review their W-4 withholding status to ensure appropriate tax deductions, thereby reducing the risk of underpayment at the year’s end and associated penalties.
If unable to prepare tax documents in time, Form 4868 can be submitted to request a six-month extension for filing taxes. However, extending the filing deadline does not postpone the tax payment. It is essential to maintain the habit of retaining tax records and grasp the correct tax calculation concept. Carefully verifying the information on tax forms can reduce the risk of inaccurately reporting income or miscalculations. In cases of payment difficulties, taxpayers can proactively contact the IRS to learn about options such as installment plans.
Liu points out that the IRS adjusts standard deduction amounts annually based on inflation rates. In 2025, the standard deduction for single taxpayers will increase to $15,000, and for married couples, it will be $30,000, applicable when filing in 2026.
If unfortunately penalized by the IRS, taxpayers can apply for penalty relief. A first-time penalty abatement (FTA) can be sought if there is no penalty record in the past three years, all taxes are submitted and paid on time.
Providing “reasonable” reasons like severe illness, natural disasters, theft, unforeseen difficulties, supported by relevant evidence such as medical reports or police reports, could lead the IRS to consider penalty reductions for late payments or filings.
Under certain justifiable circumstances, such as relying on specific legal provisions, advice from tax professionals, or official information provided by the IRS which subsequently turns out to be erroneous, taxpayers can request penalty reductions. Reasons such as administrative errors or delays by the IRS can also serve as grounds for penalty reductions. Simply contacting an IRS tax specialist via phone or submitting a written letter with supporting evidence and documents can facilitate penalty relief application. ◇