Each year you file your taxes you hope that it’s done and dusted and you don’t have to think about that year’s taxes ever again. However, there are cases where the IRS can assess penalties and interest for tax mistakes years after a return is filed.
To drill down into the most common tax moves that can trigger these penalties years later, I enlisted ChatGPT to help me dig up what you need to know about how the IRS can penalize you down the road, and how to avoid it.
1. Failure To File or Pay on Time
One of the most common ways taxpayers rack up penalties is by failing to file a return or pay the tax owed by the due date, ChatGPT said. In these cases, the IRS generally charges a penalty of 5% of the tax owed for each month (or part of a month) the return is late, up to a maximum of 25% of the unpaid tax.
If a return is more than 60 days late, the IRS can also impose a minimum penalty. That penalty is the lesser of a set dollar amount (about $525 for returns due in 2026) or 100% of the tax owed.
What makes this especially painful is that penalties and interest continue to accrue until both the tax and the penalties are fully paid.
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2. Failure To Pay Penalty
Even if you file your return on time, owing taxes you don’t pay can trigger another penalty that grows over time.
In this case, the IRS charges 0.5% of the unpaid tax each month, or part of a month, that the balance remains unpaid, up to a maximum of 25% of the unpaid tax, ChatGPT explained.
Worse, your interest compounds — it’s charged on both the tax and the penalties until the balance is fully paid. Taxpayers who don’t settle their tax bill quickly accumulate liability over years.
3. Underpayment of Estimated Taxes
The U.S. tax system operates on a “pay-as-you-go” basis, ChatGPT explained. That means taxes are expected to be paid throughout the year, either through withholding or estimated payments.
If you don’t have enough tax withheld from your paycheck, or if you’re self-employed or earning gig income and don’t send in enough quarterly estimated payments, you can face an underpayment penalty when you file. Even paying something may not be enough if it doesn’t meet required thresholds.
This issue most often affects self-employed individuals, freelancers and investors whose income fluctuates during the year. This surfaces at filing time or later if the IRS reviews prior payments.
4. Accuracy-Related Understatements
Another surprise penalty can apply even if you file on time and pay part of what you owe, ChatGPT pointed out. If the IRS later determines that you substantially understated income or misreported key items such as deductions, it can assess an accuracy-related penalty. This penalty is typically around 20% of the underpayment and often shows up after an audit or IRS examination.
Because these penalties are tied to adjustments made later, they can include interest and show up years after the original return was filed.
5. Information Return and Reporting Penalties
Taxpayers and employers are required to file various information returns, such as W-2 and 1099 forms, to report wages and payments.
If required forms are not filed, are filed late or contain incorrect or incomplete information, the IRS can impose penalties. These penalties can be assessed for each year the information return is missing or incorrect, which means recurring errors can create compounding problems over time.
6. Statute of Limitations and Long-Term Liability
Many people think the IRS can audit or penalize forever, but that’s only partly true, ChatGPT said. There are some statutes of limitations they must follow:
- In most cases, the IRS has three years to audit and assess additional tax after a return is filed. This is why tax experts recommend keeping three years’ back worth of receipts and tax info.
- If a return is never filed, there is no statute of limitations, and the IRS can assess tax, penalties and interest indefinitely.
Once the IRS formally assesses tax and penalties, it generally has 10 years to collect the amount owed, including penalties and interest.
So even if a taxpayer isn’t audited right away, once an assessment is made, the obligation can hang over them for a decade until paid, ChatGPT warned.
7. Severe Cases: Fraud and Criminal Penalties
While rare for ordinary filing errors, intentionally falsifying income or deductions can trigger far more serious consequences, the AI noted.
If fraud is found, the IRS can impose a civil fraud penalty of up to 75% of the underpaid tax. There is also no statute of limitations for fraud, meaning the IRS can pursue penalties and collection indefinitely.
These cases are uncommon for honest taxpayers, but they highlight how serious intentional misreporting can be.
What This Means for You
IRS penalties are rarely a one-time charge. Penalties for failing to file, failing to pay, underpaying estimated taxes or misreporting income can stack up with interest and linger for years. Filing on time, paying throughout the year and correcting mistakes early are some of the most effective ways to avoid tax problems that resurface long after you think a return is behind you.
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This article originally appeared on GOBankingRates.com: I Asked ChatGPT Which Tax Moves Can Trigger IRS Penalties Years Later
