One of the biggest benefits (besides adjusting income tax brackets and their respective percentages) of the Tax Cut Jobs Act (TCJA) Trumpeted by the Trump administration was the repeal of the “individual mandate penalty”. However, although other provisions of the tax bill took effect in 2018, the individual mandate penalty, which penalized taxpayers that did not carry health insurance for at least 9 months out of the year, will not be eliminated until the 2019 tax year.

Despite strong opposition to the penalty as being extremely unfair to the poorest of taxpayers (80% of those who paid the penalty earned less than $50,000/yr.), the penalty has increased steadily since it’s 2014 debut.

The Individual Mandate Penalty Started Out Small But Has Grown Over Time

• In 2014, the punishment was $95 per uninsured adult ($47.50 per child), up to $285 per family, OR 1 percent of household income. The IRS released statistics that among filers who owed a penalty for the tax year ending 2014, the average penalty was $210.

• In 2015, the penalty would be raised to $325 per uninsured adult ($162.50 per child), up to $975 per family, OR 2 percent of household income. The IRS released statistics that among filers who owed a penalty for the tax year ending 2015, the average penalty rose over 125% year-to-year to $470.

• In 2016, the penalty was again significantly raised to $695 per uninsured adult ($347.50 per child), up to $2,085 per family, or 2.5 percent of household income.

The 2.5 percent of household income penalty has remained constant since 2016, and in 2018 will remain at $695 per uninsured adult ($347.50 per child), up to $2,085 per family, or 2.5 percent of household income.

In closing, it is important to remember that although the individual mandate penalty was eliminated as part of the tax cut legislation passed in December 2017, this penalty assessed by the IRS will still be in effect for the tax year 2018.

Avoid these common types of IRS Penalties

Filing Extensions

One of the most common errors that taxpayers make every year is assuming that filing for an extension buys them more time to file their return and paying any taxes owed. Filing for extensions are easy whether you are missing crucial forms (e.g. 1099’s or K1’s) or it’s due to simple procrastination and you want to buy more time to file, there is no explanation required. What is required however, is that taxpayers remit with their extension an approximate amount they will owe, failure to do so will result in taxpayers being subject to “penalties and interest“!

Estimated Tax Miscalculation

Quarterly tax payments are due four times a year, failure to make these payments could result in an “estimated tax penalty”. This is a fairly common penalty as the IRS assessed this penalty to more than 10 million taxpayers in 2017. Although it is most common among people who are self-employed or retirees who have investments, taxpayers who don’t withhold enough taxes from their paycheck could also be subject to an estimated tax penalty. On the bright side, the penalty is one of the more reasonable ones assessed by the IRS as it generally equates to interest owed on a taxpayers underpaid funds (as of April 2018 the IRS interest rate is 5%).

Failure-to-file & failure-to-pay

The failure-to-file penalty is generally more than the failure-to-pay penalty. The IRS may remove or abate these penalties if you can show that you had reasonable cause for not filing or paying your taxes by the deadline (e.g. casualty, fire or other interventions). If the taxpayer cannot provide an acceptable reason for filing or paying late, they may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for this type of relief, the following requirements must be met 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due. Taxpayers can also reduce the failure-to-pay penalty by setting up a payment plan with the IRS commonly known as an “installment agreement”, these payment plans can cut a taxpayers penalties by as much as 50%. There are many types of installment plans offered by the IRS, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you determine which plan is most suitable for you.

Tax Filing Inaccuracy

Although some tax filing inaccuracies are forgivable (e.g. incorrect birth date or address entry), others like substantial underpayment or negligently prepared returns will not be treated so favorably and will in most cases trigger penalties and interest due. If the IRS determines that your tax return was filed inaccurately due to negligence (e.g. inadequate record keeping, or other gross understatement of taxes due) they can assess penalty for negligence. If the IRS deems that the inaccuracies or substantial underpayment are a result of an intentional attempt at fraud or evasion then civil and or criminal penalties can be assessed.

Regardless for the reason of the inaccuracies on the tax return the IRS will almost always assess interest penalties (these are in addition to any other penalty assessed) on the balance of taxes owed, and unlike other penalties that have limits, there are no maximum amount of interest (compounds daily) that can assessed! If you receive a notice from the IRS regarding a penalty or interest being assessed against you and are unsure how to proceed or simply prefer to have more experienced person address the IRS on your behalf, contact the professionals at TaxPM™ today!

Category: Interest and Penalty Abatement

Don’t be misinformed in 2018 regarding ACA (Affordable Care Act)