Here’s what to know about records to hang on to and how long you should keep them.
What is a penalty?
A penalty is a fine charged by the IRS for paying taxes after the annual deadline or for filing a tax return late. In addition to the penalty, the IRS may charge interest on the amount of money due. Tax penalties and interest are not deductible.
In general, the failure-to-file penalty is greater than the failure-to-pay penalty. The penalty for not filing a return is 5 percent of the unpaid tax balance each month that the return remains unfiled. The failure-to-pay penalty is one-half to 1 percent of the unpaid taxes. For this reason, the IRS recommends that those who cannot pay the entire tax bill still should file a return and make arrangements to pay the taxes at a later date.
Other tax penalties include charges for calculation errors or falsely reporting deductions. Individuals who underpay their taxes due to a miscalculation must pay the difference between what they paid and what they owe in addition to interest that accrues on the unpaid balance.
Taxpayers who claim charitable contributions yet do not have itemized lists that include the items donated as well as the condition they were in face a 25 percent penalty on top of the additional tax and interest they must pay.
If the tax preparer makes a mistake when adding or subtracting, you may pay less money in taxes or receive a greater refund than you deserve. When the IRS discovers the error, it sends you a bill for the amount of money you owe. You have to pay that and the accrued interest on the unpaid taxes.
Did you fall behind on your taxes and pay a penalty this year? Get a jump on next year’s taxes by estimating next year’s tax bill. Bankrate’s 1040 tax estimator can help you figure out how much you owe so you can make arrangements to pay on time.