The year 2023 marked a significant turning point in the enforcement of tax compliance in the United States, with The Internal Revenue Service (IRS) imposing a staggering $7 billion in tax penalties.
This record high represents a nearly 300% increase from the $1.8 billion in penalties assessed in 2022, serving as a major financial burden to many Americans. In this article, we’ll explore the causes of this surge, strategies to avoid penalties, and resources to seek relief if you already struggle with back tax debt.
Understanding The Key Drivers of Increased Penalties
The dramatic rise in tax penalties can be largely attributed to the Biden administration’s commitment to bolster the IRS’s resources through the Inflation Reduction Act of 2022. The Act allocated approximately $80 billion to the IRS over a decade, aimed at strengthening the agency’s ability to enforce tax laws and close the tax gap.
With this increase in funding, taxpayers experienced three significant changes that led to this unprecedented increase in tax liability.
- Enhanced Enforcement
- Rising Penalty Rates
- Average Penalty Amounts
1. Enhanced Enforcement
The additional funding has empowered the IRS to increase its scrutiny of taxpayers, particularly those who underpay their quarterly estimated taxes. This group primarily includes freelancers, gig workers, and other self-employed individuals who do not have taxes automatically withheld from their income. These taxpayers must make estimated payments to the IRS four times a year. Failure to do so accurately or on time can result in substantial penalties.
2. Rising Penalty Rates
In 2023, the penalty rate for underpayment of estimated taxes rose significantly. The rate, which stood at 3% in previous years, increased to 8% by the end of the year. This increase is a direct consequence of the Federal Reserve’s aggressive interest rate hikes, which have raised borrowing costs and, consequently, the penalties for late tax payments.
3. Average Penalty Amounts
The average penalty for underpaying estimated taxes also saw a dramatic rise. In fiscal year 2023, the average penalty amount jumped to $500 from just $150 the previous year. This substantial increase underscores the IRS’s stringent measures to enforce compliance among self-employed individuals and those with non-traditional income sources.
How to Mitigate Your Risk of Tax Penalties
Filing your taxes can be difficult, especially for individuals with unique tax situations. However, by understanding basic tax law and seeking professional guidance, you can significantly mitigate your risk of tax penalties.
With this recent surge in scrutiny, it’s especially important to understand the following:
- Timely quarterly payments
- Accurate Income estimation
- Professional advice
Timely Quarterly Payments
For individuals expecting to owe more than $1,000 in taxes, making timely and accurate quarterly estimated tax payments is the most effective way to avoid penalties. The IRS’s Direct Pay tool allows taxpayers to schedule these payments in advance, ensuring they meet deadlines.
Accurate Income Estimation
Taxpayers should strive to accurately estimate their annual income and corresponding tax liability. This practice helps in making correct estimated tax payments throughout the year, reducing the risk of underpayment.
Professional Advice
Seeking advice from tax professionals is the most effective way to mitigate your risk of tax penalties. These professionals provide valuable insights and strategies for managing tax obligations effectively, helping you navigate complex tax laws and ensure compliance.
Looking Toward the Future of IRS Enforcement
The IRS’s increased enforcement measures are expected to continue as the agency utilizes its additional resources. The goal is to enhance tax compliance and reduce the tax gap, which may result in continued high levels of penalties for non-compliance.
The $7 billion in tax penalties imposed in 2023 highlights a significant shift towards stricter tax enforcement in the United States. Taxpayers, especially those with non-traditional income sources, must remain vigilant and proactive in managing their tax obligations to avoid severe financial penalties. As the IRS continues to ramp up its efforts, staying informed and compliant will be crucial for all taxpayers.
Seeking Tax Debt Relief Following the Surge in Penalties
If you’ve been faced with tax penalties and are struggling to pay your tax debt, you don’t have to face this burden alone. With the highly reputable tax relief consultants at Anderson Bradshaw, you could seek a variety of relief strategies, depending on your situation.
Holding over 32 years of experience in the industry, our expert tax professionals at Anderson Bradshaw Tax Consulting have handled a wide variety of tax situations. For further information or to schedule a consultation, contact Anderson Bradshaw Tax Consulting at 877.550.3911 or visit www.AndersonBradshawTax.com to learn more.
