3 IRS Penalties That Could Cost You (Avoid Them With These Tips!)
Noone likes penalties or fees, especially from the IRS and even more so when they are unexpected. So let’s talk about IRS penalties.
Why This Matters to You
When it comes to taxes, it’s not just about how much you owe—it’s also about when and how you have paid your taxes and filed your return. If you file late, pay late, or don’t pay enough throughout the year, the IRS charges penalties and interest. But it doesn’t stop there, the penalties and interest can actually grow over time if left unaddressed.
This post breaks down the three most common IRS penalties for individuals—late filing, late payment, and underpayment—so you know what to expect, how to avoid them, and what to do if you’re already behind (if you have had your return prepared by Akouson, this shouldn’t apply, but not everyone is there yet :) ). Whether you’re a W-2 employee, side hustler, or someone navigating taxes for the first time, this is one item you do not want to see on your return.
And if you want help making sure you're set up properly:
Let’s chat—book a consult at Akouson Financial.
Penalty #1: Filing Late (Failure to File)
What it is: File by that April 15 deadline (or October 15 if you got an extension, which I almost always recommend filing) or face this penalty (irs.gov).
How it grows: 5% of what you owe per month (or part of a month), maxing out at 25% total.
Minimum fee: If you're over 60 days late, it’s at least $525 or 100% of what you owe, whichever is less (irs.gov).
Interest: Charged from the due date until it's all paid (irs.gov).
Bottom line: Even if you can’t pay, file on time. You can avoid a late filing penalty and it looks better to the IRS .
Penalty #2: Paying Late (Failure to Pay)
What it is: You filed on time, but didn’t pay what you owed by April 15.
What it costs: 0.5% per month on what's unpaid, up to 25% total (irs.gov).
If you're on a payment plan, that drops to 0.25% per month (irs.gov).
Reminder: An extension to file DOES NOT give you more time to pay (irs.gov).
Said differently, you still need to make a payment by April 15th, even if you are extending your return. If you are reading this and still not grasping, or just want to plan so the penalty won’t apply for you, let’s talk.
Interest: Added daily on both tax and penalties (% compounded daily, but rate is set quarterly).
Tip: You can make payments online via IRS Direct Pay (bank account), debit/credit cards, or digital wallets. Even a partial payment before April 15 reduces your penalties.
Penalty #3: Underpaying Estimated Tax
This one kicks in when you're not covering enough tax throughout the year—common for freelancers, gig earners… and sometimes even W-2 folks with one-time payments.
How to avoid it:
Owe less than $1,000 after credits, or
Pay at least 90% of this year's total tax, or 100% of last year's (110% if your AGI is over $150k) (irs.gov, irs.gov).
When it hits: If you fail the above 2 points, the IRS charges interest + an underpayment penalty.
This penalty is assessed each quarter you have underpaid taxes, so it’s never too late to take a look at your income/tax payments and catch-up!
One‑time income alert: Bonus payments or RSUs are taxed at a (statutory) flat 22% rate, which may be too low for your bracket/marginal rate. This can result in underpayment penalties. Take some time to do a projection when you receive these payments, otherwise you may have a surprise on your return (when it’s too late to do anything about it).
What to do:
Track that income (and payments).
Use the IRS online payment tool or Form 1040-ES (for paper/checks payments) to make quarterly payments.
Or book a session with me and we can talk through how i can help you calculate minimum payments to avoid an underpayment-penalty-surprise.
Penalty Relief & Disputes
If you slipped up, you might still have options. The IRS may reduce or remove penalties if you have:
Reasonable cause (like illness or disaster)
First-time abatement eligibility
Just follow the appeal instructions on IRS notices (irs.gov, irs.gov, irs.gov, taxpayeradvocate.irs.gov).
Note: Even if penalties are removed, interest stays until everything’s paid.
Final Takeaway: Don’t Let Preventable Fees Pile Up
Missing deadlines or underpaying can snowball into serious costs:
Filing late = up to 25% penalty
Paying late = up to 25% penalty + daily interest
Underpaying = penalty on top of interest for any missed quarters
Good news is that they are east to avoid: file on time, pay online by April 15 (or in installments), and make smart estimated tax payments.
Need help setting it all up, or just want to talk through to understand better?
Schedule a consult at Akouson Financial. I’ll make sure you're not paying the IRS any more than you need to.
Disclaimer:
The information provided in this blog is for general educational purposes only and should not be construed as tax, legal, or financial advice. Every individual’s situation is unique, and you should consult a qualified tax professional or financial advisor before making decisions based on this content. Akouson Financial and its representatives are not responsible for any actions taken based on the information provided herein.