What are the Penalties for Personal Tax Filing
There are many penalties associated with filing taxes. As far as personal taxes go, there are penalties if you do not file an extension when filing late, penalties for when you don’t file at all, and penalties for filing an extension without paying what you owe.
Obviously, the easiest way to avoid this is by filing your personal taxes by April 15th. There’s another option: filing an extension, which will extend your time to officially file; however, it does not affect your deadline to pay. You will still need to make an electronic payment or mail it to the IRS. Please note that the Postal Service will need to physically stamp the mail to ensure a post date is present.
Underpayment Penalty
A significant change this year is the introduction of an underpayment penalty. If you do not have all your taxes paid by the deadline, you will incur not only an underpayment but also interest. If you have not filed the extension, you will also get another penalty for not filing on time. Even the penalty fees can accrue interest.
W2 Employees
When we talk about underpayment penalties, we are not just referring to April 15th. The IRS states that taxpayers must pay their taxes in reasonable installments throughout the year. This is generally easy if you are a W-2 employee, as taxes are automatically deducted from your paycheck by your employer. This, of course, depends greatly on your W-4 filing and on ensuring the form is properly filled out each year to reflect any household changes.
Other Revenue Types
If you are a 1099 contractor, a business owner, or have other financial activity throughout the year, such as a house sale, lots of investments, or other revenue-generating activities, you may still be subject to an underpayment penalty.
To avoid the underpayment penalty when you are experiencing more revenue streams than the W2, you must make four payments. The 1st quarter payment is due on April 15th of the year of the tax return.
For example, if we are discussing filing for 2026, you would file on April 15th, June 15th, Sept 15th, and Jan 15th, 2027. If you are short on these quarterly payments, there could be interest on the differences. Right now, that interest rate is around 7% to 8%, depending on the quarter; it’s based on the federal interest rate and adjustments from there.
Luckily, this 8% does not affect many people in terms of huge bills. However, we have met people and clients who have not filed taxes in multiple years. This is when the snowball effect begins. Having an 8% late penalty once time on a $1000 tax bill will be an $80 fee.
Overall, these are the penalties from the IRS: accuracy penalty, non-filing penalty, underpayment of estimated taxes, and any due during extensions. They also have an interest in those amounts.
The Snowball Effect
The issue really lies when these penalties and interests begin to snowball. If you have both underpayment of estimated taxes penalties and non-filing penalties with interest on the amounts due, especially if you are not filing on time year over year, the bills will just continue piling up. We will always recommend reaching out to the IRS to set up a payment plan to stop the snowball.
Our recommendation is to tax plan. While it is too late to really tax plan for 2025, getting started on tax planning for 2026 can help you avoid these issues.
There are multiple options for tax planning software that help track how much you owe each quarter, enabling timely, accurate estimated payments. It can also help even W-2 employees ensure their W-4 is correct, especially given the complications that multiple jobs entail.
If you are feeling trapped by multiple years of unfiled tax returns, please feel free to contact Waterford Business Solutions at 864-351-0852. Sometimes, just getting started is the scariest part, but this problem won’t go away without some sort of plan.
