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5 Tips To Reduce IRS Penalties

5 Tips To Reduce IRS Penalties

When it comes to paying taxes, the IRS has a no-frills approach to applying penalties for a variety of different reasons. The three most common reasons and their associated penalties include:

  • Filing taxes late. Penalty up to 25% of unpaid tax amount.
  • Paying taxes late. Penalty up to 25% of unpaid tax amount.
  • Late Federal deposit. Penalty up to 15% of unpaid tax amount.

According to the IRS, there are only a handful of situations where you will find yourself exempt from these penalties. These reasons include death or severe illness, inability to obtain tax records, undue hardship, and any errors made by the IRS. Overall, it is difficult to avoid penalties. Five tips to reduce these penalties are as follows.

  1. Double check your math. Penalties most often occur when an individual calculates their taxes owed incorrectly. Bad math can mean that you are paying less that what is due, which leads to added fines. It is always beneficial to contact a tax expert or use a tax program when completing your filing. This will ensure the least amount of errors.
  2. File on time. In the eyes of the IRS, unless you have an excellent tax attorney who can persuade them otherwise, there is no real reason for you to file your taxes late. The tax filing deadline is April 15, every year. Mark your calendar and plan accordingly to avoid late fees.
  3. Keep accurate mileage records. Another reason for tax penalties is inaccurate mileage/gas claims. When operating a vehicle for business purposes, it is crucial to keep accurate records of every ride. Write down mileage when you start the vehicle and when you shut it off. Only mileage used for work/business purposes is tax deductible. It is also necessary to keep track of gas receipts and the miles used per tank, to help you accurately determine what percentage is tax deductible.
  4. Understand home office deductions. Another error that individuals make is failing to properly understand the process of home office deductions. You cannot deduct the total cost of mortgage/rent and utilities just because you have a home office. Instead, the IRS has a formula which you must use to determine the square footage and utility usage of a dedicated home office space. This percentage of your living costs is what can be tax deducted.
  5. Keep accurate records of charitable donations. One method used to decrease the amount of taxes owed is to make charitable donations. In recent years, the IRS has established stricter rules regarding charitable donations. For example, if you donate a lot of clothing to an organization, you must receive an itemized receipt of the items and the condition which they are in.

Navigating the tax laws is never easy. Individuals who have an excessive amount of deductions or large income are more likely to be audited by the IRS. Keep your records in order and follow these simple rules for decreasing penalties.

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