American Consumer Credit Counseling explains the different ways consumers could be hit with tax penalties and how their refunds may change
Boston, MA – February 22, 2019
No one is a fan of paying taxes, but being hit with a tax penalty from the Internal Revenue Service (IRS) on top of the amount owed can be a serious financial burden. So many taxpayers get hit with tax penalties every year because of not planning carefully. To help, national nonprofit American Consumer Credit Counseling (ACCC) explains the different types of tax penalties and how to avoid them.
“It is important to be aware of the tax penalties and how the tax code overhaul could affect your refund,” said Steve Trumble, President and CEO of American Consumer Credit Counseling. “Knowing about the types of tax penalties that exist is the first step in avoiding them. Tax penalties can add up quickly so the more you know the more likely you will be able to avoid any tax problems with the IRS.”
Because of the tax code overhaul in December 2017, many Americans are finding that their refunds are less than they expected, and for some, now owe money to the IRS after previously receiving refunds. Although many received tax cuts this past year, refunds are different. Refunds are decreasing because of because of the way the IRS has changed withholding on paychecks.
According to the IRS, the average penalty in 2015 was $130. The number of taxpayers who are paying a penalty has jumped 40 percent from 7.2 million in 2010 to 10 million in 2015. When it comes to tax refunds, the IRS reported that refund checks are down eight percent this year compared to last year, and those receiving a refund has dropped almost 25 percent.
ACCC explains the different types of tax penalties consumers should avoid.
- Failing to file – When a consumer fails to file their taxes, a five percent penalty is added to the unpaid tax bill each month with a max penalty of 25 percent. If a consumer fails to file, avoid the penalty by filing a six-month extension from April to October.
- Failing to pay – Each month a consumer is late paying their taxes, 0.5 percent is charged. There are installment agreements where the tax payer can set up a timeline for tax repayment. This won’t stop penalties, but the IRS will delay formal collection proceedings.
- Underpayment – This can be a problem for independent contractors as they do not have income tax withholding and are responsible for paying taxes using estimated tax payments. Underpayment can be avoided by paying 9 percent of current-year tax or 100 percent of the tax bill from the previous year of estimated payments.
- Early retirement withdrawal – The IRS gives a 10 percent tax penalty when a consumer takes money out of their 401(k) or IRA. This penalty is only waived for permitted purposes, such as up to $10,000 for a first-time home purchase or a medical bill that is not covered by insurance. Even if the penalty is waived, regular income tax is charged on the amount withdrawn.
- Incorrect filing – The IRS can be forgiving with tax return errors. But they do have the right to enforce penalties. If a return or tax break is claimed mistakenly, the penalty is an added 20 percent of the underpaid amount. Intentionally understated bills are charged 75 percent on top of the underpaid amount. Consumers need to do their best to pay attention and avoid errors.
ACCC is a 501(c)3 organization that provides free credit counseling, bankruptcy counseling, and housing counseling to consumers nationwide in need of financial literacy education and money management. For more information, contact ACCC:
- For credit counseling, call 800-769-3571
- For bankruptcy counseling, call 866-826-6924
- For housing counseling, call 866-826-7180
- Or visit us online at ConsumerCredit.com
About American Consumer Credit Counseling
American Consumer Credit Counseling (ACCC) is a nonprofit credit counseling 501(c)(3) organization dedicated to empowering consumers to achieve financial management through credit counseling, debt management, bankruptcy counseling, housing counseling, student loan counseling and financial education concerning debt solutions. To help consumers reach their goal of debt relief, ACCC provides a range of free consumer personal finance resources on a variety of topics including budgeting, credit and debt management, student loan assistance, youth and money, homeownership, identity theft, senior living, and retirement. Consumers can use ACCC’s worksheets, videos, calculators, and blog articles to make the best possible decisions regarding their financial future. ACCC holds an A+ rating with the Better Business Bureau and is a member of the National Foundation for Credit Counseling® (NFCC®). For more information or to access free financial education resources, log on to ConsumerCredit.com or visit https://www.consumercredit.com/debt-resources-tools/