IRS Raises Underpayment Penalties—How to Avoid “Giant Fees”
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Even when you’re well prepared and using the right tools, things can still go wrong when it comes time to pay your yearly taxes to the IRS (Internal Revenue Service). Most people fear getting audited above all else due to an accounting error or taking the wrong type of deduction. But taxpayers should also be aware that the IRS has raised its underpayment penalties, which could result in some “giant fees” being added to your bill. Read on to see how you can avoid this costly mistake.
RELATED: IRS Announces Major Tax Filing Changes for Next Year—Are You Affected?
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How much you owe the federal government each year can vary drastically from person to person. People who are self-employed, freelance workers, and anyone who generates income in any other way often have a particularly complicated tax filing process as they calculate precisely what amount to send the IRS—which is why many opt to pay estimated taxes quarterly throughout the year , according to personal finance website The Motley Fool.
However, taxpayers may sometimes miscalculate the amount they owe the IRS and underpay their share. In these cases, the agency will then charge the person interest on what they owe as well as additional percentage points to the taxpayer’s annual rate. Unfortunately, this can result in a hefty amount getting added on top of one’s standard tax bill.
RELATED: 4 Warnings About Using TurboTax, According to Experts .
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Similar to income brackets, the IRS sets and posts the penalty amounts it charges for people who underpay for their quarterly taxes. But due to inflation, the agency has drastically increased the amount by charging 8 percent interest on what’s due, The Wall Street Journal reports. This is more than double the 3 percent rate charged in 2021.
The move comes as the IRS retools its policies in the face of rising interest rates. And the penalties can add up: The agency said it handled over $1.8 billion in late charges on roughly 12.2 million individual tax returns in 2022, The Journal reports.
“It’s a cautionary tale for individuals to think about as we get toward year-end,” Joseph Doerrer , a New Jersey-based certified public accountant (CPA) and certified financial planner, told The Journal . “Are you where you should be?”
RELATED: IRS Issues New Alert on What You Must Do Before the Year Is Over .
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There are still a few exceptions to who’s subject to a penalty. According to IRS policy, anyone who is found to owe a balance less than $1,000 isn’t liable. Neither is anyone who paid at least 90 percent of the taxes they owe for the year in question on time. Also, anyone who paid 100 percent of the amount they owed as estimated from the previous year on time each quarter is also off the hook.
But for some workers who don’t have a W-2 and have things like payroll and social security tax withheld from their paychecks, the final number can sometimes come as a serious shock. The unexpected amount can also result in taxpayers being unable to pay what they owe in full, which can land them in a payment plan with the agency that charges further interest and makes the bill even more expensive, The Journal reports.
The fees can come as a surprise for workers who decide to dip into freelance or side gigs. According to Sameet Durg , a marketing executive who also works as an independent consultant, the shock of owing thousands of dollars on top of what was already paid at the end of the year was a serious wakeup call.
“Now I pay attention to taxes all year around,” Drug told The Journal . “I don’t want the giant hit in April.”
RELATED: If You Already Did Your Taxes, You May Need to File an Amended Return, IRS Warns .
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While figuring out what you owe can feel overly complicated, there are still a few things to keep in mind if you want to avoid shelling out even more to the IRS.
Most importantly, stay on top of any extra income you generate throughout the year and make it a point to stick to the agency’s payment schedule, Doerrer tells The Journal . It also helps to keep track of how much you’re making year to year, aiming to put in up to 110 percent when your income has increased and making sure to hit 90 percent per quarter when it’s gone down.
If you’re still confused, you can use a tool the IRS offers that can help calculate what you owe in withholdings . You can find out how much you should be paying each quarter by inputting some information from recent pay stubs, investments, side jobs, and your most recent tax return.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you’re spending, saving, or investing, always consult your financial advisor directly.
- Source: Underpayment of Estimated Tax by Individuals Penalty
- Source: Tax Withholding Estimator
IRS Announces Major Tax Filing Changes for Next Year—Are You Affected?
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The fact that we have to pay our taxes every year is one thing that famously never changes. And while there are plenty of different tools to help you file , it’s more often significant changes in your own life that can alter the process. But now, the Internal Revenue Service (IRS) has announced a set of major changes for next year. Read on to see if you’re affected by the latest updates and what it could mean when it comes time to file.
RELATED: IRS Warns That Claiming These Credits Can Get You Audited and Fined .
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Typically, any change in the tax rate is a development that tends to grab plenty of headlines no matter which way it’s heading. But while those numbers will remain the same the next time you file , the IRS has released an updated set of tax brackets for the 2023 tax year.
The adjustments affect where the boundaries are set for each income level, with progressively increasing rates as amounts increase. This year’s changes take into account inflation, with upper limits that are 7 percent higher than brackets in 2022, Forbes reports. And while deductions and other elements must still be factored in, these brackets can help estimate roughly how much you’ll pay when it comes time to file.
RELATED: 4 Warnings About Using TurboTax, According to Experts .
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So, how much will each group now pay? The lowest tax bracket begins at 10 percent for individuals with $11,000 or less in taxable income—or $22,000 for married couples filing jointly. It then ranges from 12 percent for individuals making between $11,001 and $44,725, 22 percent for those with $44,726 to $95,375 in taxable income, and 24 percent for individuals earning between $95,376 to $182,100.
The new rate for individual income between $182,101 and $231,250 is 32 percent, while people earning between $231,251 and $578,125 fall into a 35 percent rate. It tops out with those who take in $578,126 or more in 2023 paying 37 percent. The complete list of updated brackets and rates—including those for married couples filing jointly or separately—can be found on the agency’s website.
RELATED: 5 Reasons the IRS Might Mistakenly Audit You, Finance Experts Say .
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But it’s not just your income bracket that could be changing for this year. In a press release on Oct. 17, the IRS also announced that it would begin rolling out its free tax filing program known as Direct File during the 2024 filing season for certain taxpayers.
The service aims to provide an affordable alternative to tax preparation services many people use to file annually. It’s estimated that Americans spend an estimated $11 billion each year nationwide for professional assistance, CBS News reports.
However, not everyone filing will be able to use the service right away. The agency specifies that eligibility will be limited to “taxpayers with relatively simple returns,” targeting those with specific income, credits, and deductions, according to the press release.
RELATED: 6 Tax Return Secrets From Accountants .
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Besides individual limitations, where you live could also keep you from using Direct File next year. The IRS said the free program will be available to eligible residents in Arizona, California, Massachusetts, and New York, where state governments have worked to incorporate their own taxes into the new system. Those who live in one of the nine states that do not collect state income tax—Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—could also qualify.
Despite its limited initial reach, officials hope the early rollout will reach at least several hundred thousand taxpayers , CNN reports. The initial phase will also help work out any issues and see if the program could be expanded to a broader pool of potential filers.
“The plan is to roll it out in increments that get larger and larger, consistent with how products like this are rolled out in the private sector,” IRS Commissioner Daniel Werfel told reporters during a call, per CBS News. “We want to make sure it is an easy-to-understand pilot.”
- Source: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
- Source: https://www.irs.gov/newsroom/irs-advances-innovative-direct-file-project-for-2024-tax-season-free-irs-run-pilot-option-projected-to-be-available-for-eligible-taxpayers-in-13-states
IRS Announces Major Tax Filing Changes for Next Year—How You Can Benefit
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Filing your taxes may be the one thing you count on doing every year, but it might not always be the same process. Even when you haven’t had a major life change such as getting married or starting a new job, the Internal Revenue Service (IRS) still makes adjustments to the process that can affect how you submit your paperwork. In fact, those who are already getting everything in order ahead of the deadline might want to take note after the IRS announced a major set of tax filing changes for next year. Read on to see how you can benefit from the latest update.
RELATED: IRS Warns That Claiming These Credits Can Get You Audited and Fined .
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While plenty of people choose to file their taxes online , the process can still involve a decent amount of physical paperwork for some who require extra forms or documentation . But if you’ve had to rely on the postal service to get everything in on time in the past, you can breathe a sigh of relief.
In a Nov. 7 press release, the IRS announced that it had reached its goal of implementing the Paperless Processing Initiative three months ahead of schedule. The program, which was announced in August, makes it possible for taxpayers to submit all correspondence and responses to notices using a Document Upload Tool on the agency’s website.
The new service provides another significant upgrade from the latest changes released last February, which made the nine most common correspondences available for digital reply, Yahoo Finance reports. The prior system relied entirely on using physical mail to conduct business.
Not only will the new system cut processing time in half, but the agency also says the program will help save over 200 million pieces of paper each year. And while the IRS estimates that 94 percent of individual taxpayers will no longer need to use the mail, those who choose to file through the post will still be able to if they choose to do so.
RELATED: IRS Issues New Alert on What You Must Do Before the Year Is Over .
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If there’s any silver lining to paying your taxes, it’s getting a refund down the line. Now, those who are anxious to see some of their cash come back can get a better idea of when it’s coming thanks to the agency’s newly improved Where’s My Refund tool.
According to the IRS announcement, taxpayers will be able to use the online feature to check the precise status of their refund, as well as find out if they need to respond to an agency request for more information. Previously, the tool provided a generic message that didn’t offer any specific information about a person’s filing.
The tool has seen plenty of use in the past, with about 54 million taxpayers using it to generate 550 million hits in 2022, per the IRS. The agency says the detailed updates will likely reduce the number of phone calls made to the IRS for refund status inquiries.
RELATED: 4 Warnings About Using TurboTax, According to Experts .
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When you’re looking for a quick answer to your questions while preparing your taxes, nothing beats the efficiency of a phone call. This year, the agency says it is continuing with improvements it’s made to its phone service to make the service even more accessible.
The agency says it plans to reach at least an 85 percent level of service once again during the 2024 filing season, carrying over improvements made to the system during last year’s filing brought about by hiring a stable of new representatives, per the press release. The IRS will also aim to have an average wait time of five minutes or less and offer a call-back option if the projected wait time is longer than 15 minutes.
RELATED: If You Already Did Your Taxes, You May Need to File an Amended Return, IRS Warns .
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Those who want some in-person help will also see some improvements. The agency says it is opening or has reopened 50 Taxpayer Assistance Centers nationwide and will be increasing the number of available hours for assistance by more than 8,500 hours. The complete list of locations and reopening dates can be found in the press release.
The IRS also says it will be rolling out more pop-up centers and aims to increase the number of taxpayers receiving free in-person preparation assistance by 50,000 returns. All told, some experts think the updates could help smooth out what can be a notoriously tricky and confusing process.
“I think these changes are good news,” Grant Dougherty , enrolled agent and founder of Dougherty Tax Solutions, told Yahoo Finance. “Anytime the taxpayer experience can be improved, I think it’s always a win for everyone involved. I do believe the [2024 filing season] will be a little smoother.”
