July 11, 2024

IRS Penalties Skyrocket: A 300% Surge Hit American Taxpayers in 2023

Record-High Penalties for Underpayment
In an unprecedented move, the IRS slammed Americans with $7 billion in tax penalties in 2023, marking a staggering 300% increase from the previous year. Most of these fines targeted those who underpaid their estimated quarterly income taxes, particularly freelancers, gig workers, and self-employed individuals.
Image Credits: Stefani Reynolds/AFP via Getty Images

Record-High Penalties for Underpayment

In an unprecedented move, the IRS slammed Americans with $7 billion in tax penalties in 2023, marking a staggering 300% increase from the previous year. Most of these fines targeted those who underpaid their estimated quarterly income taxes, particularly freelancers, gig workers, and self-employed individuals.

Drastic Increase in Average Penalties

IRS data reveals a sharp rise in the average estimated tax penalty, jumping to $500 in fiscal year 2023 from just $150 the year before. The Wall Street Journal first broke this alarming news.

Surging Penalty Rates

This surge stems from a significant hike in the IRS penalty rate for late or inaccurate payments, which soared to 8% in October from 3% in September. The increase is a ripple effect of the Federal Reserve’s aggressive interest rate hikes, which pushed rates to the highest levels since 2001. The IRS calculates its underpayment penalties by adding three percentage points to the benchmark federal funds rate.

Who’s Affected?

Taxpayers can withhold taxes from their income or make estimated payments to the IRS four times annually. This system is commonly used by independent contractors, freelancers, gig workers, small business owners, and landlords, who do not have taxes automatically withheld from their income.

Rising Number of Affected Taxpayers

The IRS has noted a growing number of taxpayers falling prey to estimated tax penalties, which can run into several hundred dollars. Taxpayers can avoid these penalties by paying at least 90% of their taxes owed during the year.

Expert Advice on Mitigating Penalties

Experts advise paying as much of the tax owed by the deadline if you cannot pay the total amount to reduce potential penalties. Missing a required quarterly payment can result in penalties later, with second-quarter estimated payments due on June 17 and third-quarter payments due on September 16.

Strategies to Avoid Penalties

Paying by the first-quarter April 15 deadline can significantly reduce or eliminate any penalties. The IRS recommends using the Direct Pay tool as the fastest way to make quarterly payments, allowing taxpayers to schedule payments in advance.

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