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August 17, 2017

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Surprise! 10 million taxpayers get an unexpected penalty.

10 million taxpayers recently received an unexpected penalty by the IRS. The problem? These taxpayers underpaid their estimated taxes.

When does a tax penalty apply? Essentially, a penalty may apply if a taxpayer does not pay 90 percent of his or her tax obligations throughout the year.

The penalty applies to those who are required to pay an estimated tax on income that is generally not subject to withholding. The IRS explains that this can include income gained from “self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards.” 

Why is there a spike in penalties? The piece in Accounting Today discussed the trend, noting the sharing economy may be part of the problem. A spokesperson for the IRS told the news source that the agency sees a spike in these assessments annually, most often during summer months. This could be connected to rentals that are enjoyed by families taking advantage of summer vacations.

How can I avoid this type of tax penalty? Some tips to help avoid these surprise tax penalties include:

  • Review withholding. If you got caught with a penalty last year, take a moment to review your withholdings or estimated taxes for next year.
  • Make adjustments. It may help to adjust how much you are paying throughout the year to avoid the penalty in the future.
  • Check for exceptions. There are some cases that qualify for an exception to a penalty for an underpayment of estimated taxes. This can include certain farming businesses or a death in the family.

If you do receive notice of a penalty, it is wise to seek legal counsel. It could be the sign of an impending audit. An attorney can help guide you through the process and work to mitigate any additional tax obligations.

IRS