IRS Deals Major Blow To Some Taxpayers

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(FixThisNation.com) – The Internal Revenue Service (IRS) is making a notable change in its approach towards taxpayers who underpay their taxes. The interest rate penalty for such underpayments is set to increase significantly, rising to 8 percent. This is a substantial hike compared to the rate of just 3 percent that was in place only a few years ago.

This adjustment is particularly timely as it precedes the spring tax season, a period when many taxpayers settle their annual tax obligations. The IRS, as per its regulatory framework, reviews and revises the interest rate penalty every quarter. This rate applies to individual taxpayers, excluding corporations. Key groups affected by this change include gig workers, independent contractors, and self-employed individuals. These segments of the workforce could face penalties if their tax payments fall short of the IRS’s estimated tax liability.

However, there are specific conditions under which taxpayers can avoid the underpayment penalty. If the total amount due is less than $1,000 after accounting for all tax credits and deductions, the penalty does not apply. Additionally, to evade this penalty, taxpayers in these categories must make estimated tax payments quarterly. These payments should cumulatively cover at least 90 percent of their tax liability for the year. In the context of the tax year 2023, the final quarter’s payment deadline is set for January 16, 2024.

This increase in the underpayment penalty rate is a critical development for those who are not regular W-2 employees. W-2 workers, whose taxes are typically withheld from each paycheck, are generally less impacted by this change. For these employees, the common outcome of the tax filing process is a refund, as their taxes are usually pre-paid through withholdings. In contrast, those without automatic tax withholdings, such as freelancers and independent contractors, must be more vigilant in their tax planning and payments to avoid incurring additional penalties under this new, higher rate.

The IRS’s decision to increase the penalty rate reflects an effort to ensure compliance and accuracy in tax payments, particularly among those taxpayers who have more control over their payment schedules and amounts. As the tax landscape evolves, understanding these changes and their implications is crucial for all taxpayers, especially those who are self-employed or work in the gig economy.

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