Most taxpayers want to know how they can pay less tax. While there are some individuals in certain situations who are able to reduce their taxes with advance planning and diligence, the most universal way to avoid paying unnecessary sums to the IRS is to avoid tax penalties. The following tips explain common penalties and suggest ways the average taxpayer may avoid paying them.
Retirement Minimum Distributions
Tax penalties may be steep for individuals who are 70 1/2 or older and fail to take their required minimum distributions (RMDs). Those who do not take their distributions may end up paying a tax on 50% of the required amount they fail to withdraw. However, failure to do so may avoid being penalized by reasonable error and reasonable steps taken to correct the error.
The Domino Effect of Premature Retirement Plan Distributions
People who need cash immediately may not be discouraged by the 10 percent penalty that is applied to premature retirement plan distributions. However, many taxpayers are unaware that the not only is the 10 percent added to their regular tax rate, but receiving the distribution may raise the taxpayer’s income into a higher tax bracket. Furthermore, taking the distribution may also trigger the 3.8 percent Net Investment Income Tax and the .9 percent Additional Medicare Tax. Exceptions to the penalty may apply when receiving the distribution to pay for college, home purchase expenses, insurance, or medical expenses. However, the rules must be read carefully in determining eligibility.
FBAR
Individuals who have financial authority or signature interest over foreign financial accounts with a total value of at least $10,000 must report the account to the Department of Treasury using a form FinCen 114, previously known as FBAR. If a the taxpayer is found to have willfully avoided filing the form, a tax penalty of the greater of $10,000 or 50 percent of each account may be assessed.
Payroll Taxes
Business owners who do not follow payroll tax requirements may receive any of several tax penalties. Failure to follow requirements may result in a monetary penalty of $10,000 plus the amount of unpaid taxes or even a maximum five year prison sentence if failure to follow the regulations is found to have been willful.
Gary Kaplan is a knowledgeable CPA who can assist you in understanding the various tax penalties and the best way to avoid those penalties. Gary Kaplan is available to assist corporate and individual taxpayers in Florida, Maryland, Washington, D.C., New York, and Utah.
