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Can’t File Your Freelance Tax Return or Pay Your Tax Bill? Here’s How to Reduce the Penalties You May Owe

Not sure you can pay your freelance tax bill or file this year’s tax return on time? Like any taxpayer who doesn’t meet their tax obligations, you may owe a penalty. You may also owe multiple penalties, depending on your situation.

If any of the following situations apply to you, the IRS may charge a penalty:

  • Failure to file your tax return on time
  • Paying the tax you owe late or not in the right way
  • Not preparing an accurate return
  • Failing to provide accurate information returns

Interest may also be charged on a penalty if it is not paid in full. Many penalties are charged each month until the full amount is paid, which means they can add up quickly. This is why it is important to understand the different types of penalties, what you need to do if you receive a penalty notice, and how to avoid tax penalties.

Haven’t paid your tax bill or filed a prior year return? Watch your mailbox for an IRS notice.

When you are charged with a penalty, the IRS will send you a notice or letter by mail (Yes, that is right, they still use traditional mail!). The notice will include all the information about the penalty, the reason for the charge and what you should do next. An identification number will be included with the notice.

You should always verify that the information in your notice or letter is correct. Some issues can be resolved easily and a penalty may not apply as long as you can provide evidence to support your case. 

9 common tax penalties which may be applied to unpaid, late, or unfiled freelance taxes

There are several different types of penalties for which the IRS may issue a notice or letter including:
  • Information Return penalties apply to taxpayers who did not offer the correct or enough information on their return by the due date.
  • A Failure to File penalty applies to taxpayers who don’t file their tax return by the due date.
  • A Failure to Pay penalty applies to taxpayers who don’t pay the taxes owed by the due date.
  • Accuracy-Related penalties apply to taxpayers who don’t claim all their income or who claim deductions or credits for which they don’t qualify.
  • An Erroneous Claim for Refund or Credit Penalty applies to taxpayers who submit a claim for refund or credit of income tax that involves an excessive amount and reasonable cause does not apply.
  • A Failure to Deposit applies to taxpayers who don’t pay employment taxes accurately or on time.
  • Dishonored Checks can net a penalty when they are used to pay taxes but are  returned or dishonored by a financial institution.
  • An Underpayment of Estimated Tax by Individuals applies when taxpayers don’t pay estimated tax accurately or on time as an individual.
  • An International Information Reporting applies to certain taxpayers who fail to timely and correctly report foreign sourced financial activity.

Interest on penalties may apply to your freelance or gig economy taxes.

Interest is charged on penalties, the rate at which this occurs depends on the type of penalty. You can find more information about the interest charged by the IRS on their website. To stop future penalties and interest from adding up, you can pay in full or in smaller increments on the IRS website.

How to request the removal or reduction of a penalty.

Penalties may be able to be removed or reduced if you, as the taxpayer, acted in good faith and can show reasonable cause for why you weren’t able to meet your tax requirements. By law, interest cannot be removed or reduced unless the penalty is removed or reduced.You can learn more about penalty relief on the IRS website.

How to dispute an IRS penalty. 

If you feel that the IRS penalties being assessed to you are not correct, you can dispute them. TThe first step is to call the IRS on the number that is printed on your notice or write a letter to the IRS explaining why they should reconsider the penalty. Any supporting documents you may have for your cause should be included.

Make sure you have this information readily available for when you call or write your letter: 

  • The notice or letter the IRS sent
  • The penalty you want reconsidered
  • For each penalty, an explanation of why you think the IRS should remove it

If a notice or letter that you received has instructions or deadlines for disputing the penalty, pay careful attention. You must follow the instructions to dispute the penalty.

You can find the numbers to call on the IRS website.

Avoid penalties 

The best way to avoid a penalty is to file accurate returns on time. If you are unable to do this, or to pay your taxes on time, make sure you file for an extension or for a payment plan.

Can’t file your freelance taxes on time? Apply for an extension of time to file.

If you need more time to prepare your tax return, apply for an extension of time to file. For example, if you do not have all of the information necessary to file your 2022 tax return, you can file an extension for six months, which means you will have until October 2023 to file the return without paying a late filing fee. This does not grant you an extension of time to pay the tax owed.

If you cannot pay your 2022 taxes, a payment plan can help you pay over time. This is always a better option than not paying at all or paying late on your tax bill. Pay what you can now and apply for a payment plan. Future penalties may be reduced when you set yourself up with a payment plan.

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Picture of Jonathan Medows, CPA

Jonathan Medows, CPA

Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.

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