The IRS imposed $7 billion in tax penalties in fiscal 2023, marking a record high and an almost quadruple increase from the previous year.
Most of the penalties were imposed on people who did not pay enough in estimated quarterly income taxes, primarily affecting freelancers and other self-employed workers.
In fiscal 2023, the average estimated tax penalty increased to approximately $500, up from around $150 in 2022, the Wall Street Journal reported.
At the same time, the number of taxpayers affected increased from 12 million to 14 million.
In total, the IRS collected $7 billion in estimated tax penalties in 2023, nearly quadrupling the $1.8 billion recorded the previous year.
The IRS penalty for people who miss deadlines or underpaid their estimated taxes rose to 8% in the fiscal year’s fourth quarter, almost three times 2022’s rate of 3%.
This penalty is determined by adding 3 percentage points to the benchmark federal funds rate.
The rise in penalties is a consequence of the Federal Reserve’s aggressive tightening policy, resulting in interest rates reaching their highest level since 2001.
Employees are required to pay the majority of their income tax through paycheck withholding, and individuals with additional taxable income, such as from investments or self-employment, must make quarterly estimated tax payments. Taxpayers can also choose a combination of both options.
People who underpaid their taxes throughout the year face quarterly interest penalties on their deficits.
However, taxpayers can avoid these penalties by paying at least 90% of their owed taxes annually or by paying as much as possible by the deadline to reduce the potential penalty.
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Second-quarter estimated payments were due Monday, June 17, failure to meet this deadline may result in penalties later. Third-quarter payments are due on Sept. 16.
According to the IRS, the quickest method for making a quarterly payment is electronically through direct pay, which also allows taxpayers to schedule payments in advance.