"A Surging IRS Penalty Is Costing Americans Billions. Here’s How to Avoid It" - Laura Sanders

---

Since the conclusion of World War II, congress required tax filers who obtain income through a non-employment source to estimate tax payments each quarter. For this group of people, the process of paying taxes may have just increased in difficulty.

Laura Saunders of Wall Street Journal reports that penalties for quarterly income tax payers have risen as of late. In this article, Saunders delves into the ways to avoid these penalties, particularly for groups such as retirees, investors, non-employee workers, employers who aren’t withholding enough of their employee’s income, business owners, and more. 

Why Are Tax Penalties Increasing?

So what causes a penalty? A penalty is incurred when an individual's estimation of their tax is too little. The penalty is composed of an interest rate on the individual’s tax underpayment. In 2021, the rate was 3%, in 2023, it rose to a shocking 8%.

In 2023, tax penalty prices rose by $350 as compared to the previous year ($500 in 2023), and affected tax-filers rose by 2 million (14 million affected in 2023). Additionally, the estimated total penalty amount collected by the IRS was almost four times as much compared to 2022 ($7 billion total). The IRS claimed that these numbers were due to higher interest rates and post-pandemic recovery which were both major contributing factors among others. Retiree George Young believes that his tax penalty came from a misstep in his timing. 

How to Avoid Penalties

In order to help taxpayers avoid these penalties, Saunders recommends having a basic understanding of the penalty rules. Firstly, taxes over $1000 must be paid by at least 90% well in advance to April 15th, employees by the end of the year, and for other income source earners, January 15th. Secondly, she wants people to know that safe harbors, available to those who pay their taxes in full by the deadline, apply quarterly, not annually.

Because the IRS computers can sometimes accidentally give a penalty to people who estimate their tax using a fourth-quarter Roth IRA conversion, filing IRS Form 2210 and Schedule AI will resolve this issue by telling the IRS the quarter that the recorded income was earned and when the tax was paid. This will help avoid unnecessary penalties due to technological error. Finally, she recommends that those who are eligible to have their income withheld, including retirees, should do so. By having their income withheld for taxes, it ensures that, by law, they cannot be penalized for a late tax delivery. 

---

Works Cited

Saunders, Laura. “A Surging IRS Penalty Is Costing Americans Billions. Here’s How to Avoid It.” The Wall Street Journal, Dow Jones & Company, 14 June 2024, www.wsj.com/personal-finance/taxes/quarterly-taxes-penalty-rate-59139fca. Accessed 13 Dec. 2024.