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Guest Post: 4 Tax Penalties Every Taxpayer Should be Aware of

August 19, 2010 · Filed Under Random · 5 Comments 
This blog post was provided by Matt Robinson of TaxDebtHelp.com. If you are looking for more information on IRS Penalty Abatement or would like to be kept abreast on various tax news and changes visit their tax debt blog today.

Being aware of the various tax penalties the IRS could impose will help you avoid them. Here are four tax penalties every taxpayer should be aware of and avoid:

Failure to File Penalty

The Failure to File Penalty is imposed on taxpayers who do not file their tax return or request a tax filing deadline by the due date of April 15th. If you are unable to complete your return before the deadline, make sure you request an extension which will give you until October 15th to file. If an extension is granted, and you still do not file your taxes by the new deadline, you will be charged a Failure to File Penalty which is 5% of the total amount of tax liability per month for a maximum of 25% of your total tax liability.

If it is found that you didn’t file your taxes for fraudulent or negligent reasons, your fine can be increased as much as 75% of your original, total tax liability.

Avoid having to pay this penalty simply by submitting your tax return on time.

Failure to Pay Penalty

The Failure to Pay Penalty is calculated from the original payment deadline of April 15th, and is .5% per month for each month you don’t pay your owed taxes in their entirety. This penalty can exceed 25% of the unpaid balance on your taxes.

This penalty is in addition to the interest rate charged to taxes owed. The average IRS interest rate for underpayment of tax liabilities is around 4% currently, but the rate changes every three months.

Avoid the Failure to Pay Penalty by paying your taxes by the due date. If you cannot pay your total tax liabilities in full, then it is best to pay what you can in order to reduce the failure to pay penalty.

Accuracy Penalty

If the IRS finds that your tax return is inaccurate, there will be accuracy penalties and interest imposed. If the mistakes do not appear to be intentional, the accuracy penalty is normally 20% of the total understatement of tax. If the mistakes appear to be fraudulent or there were gross valuation misstatements, the penalty may be as much as 40%.

If you believe the penalty you receive for inaccurate information on your tax return is due to inaccurate advice you received from an IRS employee, you may be able to file a penalty abatement and have the penalty removed.

There are some other situations which may result in the removal of the penalty as well, and a tax professional can assist you with determining if your reason for the inaccurate information would be considered with reasonable cause or a valid excuse.

You can avoid the Accuracy Penalty by checking your tax return carefully to ensure everything on it is correct. Use the assistance of tax professionals if you need help filing your tax return.

Tax Fraud Penalty

If you have underpaid taxes owed due to fraud, you will receive a tax fraud penalty of 75% of the underpayment. The IRS will examine each return with a tax underpayment to determine whether or not there is evidence of fraud. Negligence, or not understanding tax laws is not considered fraud. You can avoid a tax fraud penalty by completing your tax return with accurate information, and following IRS rules.

Book Review: The Bogleheads’ Guide to Investing – Part 2

September 19, 2008 · Filed Under Book Reviews · 2 Comments 

By Taylor Larimore, Mel Lindauer, and Michael LeBoeuf

This is part 2 of a multi-post book review of the excellent book, The Bogleheads’ Guide to Investing .  If you haven’t already, please check out part 1 now .

What else is good about the book?

Consider taxes

When we left off yesterday, we had just finished talking about how costs were critically important when choosing mutual funds.  If you are investing in a taxable account, it is most likely that the biggest expenses you will face are taxes.  It is therefore quite important to consider taxes when planning your portfolio.  The most important suggestion the authors have is to ensure that your least tax efficient funds are in your tax-advantaged accounts.  If you don’t have the luxury of any tax-advantaged accounts, make sure that you are investing in tax-friendly mutual funds.

Why would I want to invest in index funds to only get the market average?

Of course it makes perfect sense that you should strive to get better returns on your investments than the market in general, as provided by index funds.  This is one case, however, where common sense is just not correct.  In yesterday’s post I listed the reasons the authors give for investing in index funds.  Another item the authors would like you to consider is that it is extremely difficult to pick the best mutual funds in advance.

Multiple studies are referenced by the authors showing that the "hot" funds for one-year, five-year, or ten-year periods are very unlikely to be the "hot" funds in the subsequent period.  An example presented is from a Vanguard study where they looked at the top 20 US equity funds for the ten-year period ending in 1993.  Over the next ten-year period, only one of those top 20 funds were even in the top 100!  Remember, you need to pick a fund before it experiences its great growth.  It does you no good to have last year’s hot fund if it is performing below average this year.

The authors wrap up Part I of the book with chapters on investing for college, managing a windfall, and a discussion on whether or not you need to hire a financial advisor to manage your money for you.

The importance of rebalancing

Part II of the book starts off with a discussion on rebalancing.  The authors present two basic rebalancing strategies:

  • Time-based – Rebalance after a certain time period.  Most people do this quarterly or yearly.  Of note is a Morningstar study mentioned in the book that showed people who rebalance every 18 months get the same benefit and lower costs than those who do it more frequently.
  • Expansion bands – Rebalance when your original asset allocation gets skewed by more than a predetermined percentage (say 5%).

Behavioral Economics

There was some fantastic information in this chapter about why smart people make bad investment decisions.  I will list the items presented by the authors here but I can’t do into more detail today.  I am planning to do a number of posts on these topics, however, as I find them very interesting and important to understand.

  • Greed & Fear
  • Ego & Overconfidence
  • Loss aversion -a loss if felt more than an equal gain
  • Paralysis by analysis – spending too much time analyzing a situation and never acting
  • The endowment effect – people tend to confuse familiar with safe and overvalue what they already know
  • Following the herd
  • Mental accounting – treating money differently based on where it comes from – i.e., viewing your tax return as a windfall
  • Anchoring – clinging to an old belief or comfortable opinion even if it is wrong
  • Financial negligence

The final three chapters stray off of strict investment advice and cover the topics of ensuring you outlive your money, protecting yourself through insurance coverage, and passing on your estate when you die.  These contain some useful information and act to round out the book.  Again, this book is certainly more than a strictly investment advice book.  Though it does not go into terrible detail on these other topics, there is  some good "bullet-point" level information in them.

What is not-so-good about the book?

Overall, I really found this to be a useful book but there were some issues with it.  First, if you are not into index funds, you are going to have a hard time reading this book.  The authors are very pro-index funds and that philosophy is reflected throughout the book.  Of course, if that is you, maybe this is a good book for you to read to examine what the authors claim about their strategy and give it a fair look.

Though this book is not strictly about Vanguard, there are references to Vanguard littered throughout it.  They do mention other index funds, but they clearly love Vanguard.  Of course, what can you expect from a book with this title?

Finally, I didn’t really get the organization of the book.  The chapters do not flow logically for me.  I know that this is a minor point (and it probably says more about the way my brain works then the authors’ organizational capability) but it can give the feel that the book is disjointed and somewhat scatter-brained.

So what is my recommendation?

I really think this is a useful book for someone who wants to learn the basics of investing.  There is a lot of educational information in here about the stock market and especially index funds. Of course, the authors are espousing a certain investment philosophy and I just so happen to agree with that philosophy.  Actually, I wasn’t totally sold on the low-cost index fund thing when I first started reading this book.  It did a good job of explaining some of the issues that I was confused about in a way that made the index fund strategy more understandable and plausible.

After reading through the book and my notes, I have decided to put this book onto my virtual bookshelf.  It really does present a great overview of the low cost mutual fund strategy of investing.  I feel it is a valuable read for that reason. I highly recommend that you read this book as I think you might learn a lot from it.  Whether you buy or borrow it does not matter, though at over 300 pages, you might have to renew it.  For full disclosure purposes, I borrowed it from my local library (twice).

Want to borrow this book? Search your local library

Want your own copy? Buy this book now at Amazon.com

Check out the other books currently on my virtual bookshelf

The Lesser of Two Evils: Determining Which Loan to Pay off First

August 4, 2008 · Filed Under Paying off Debt · 5 Comments 

The other day I was asked a good question: "We are looking to put some extra money towards prepaying one of two loans, so how would you go about determining which one to pay off?" Like most good questions, there is no easy answer. For most debt repayment questions, I would turn to Dave Ramsey’s debt snowball (pay off the loans in order from smallest balance to highest) or a similar technique (pay off the loans in order from highest interest rate to lowest). But this person was asking a slightly different question. Click here to continue reading…

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