The IRS can assess a wide variety of penalties against you. Penalties can be assessed for the various types of taxes that you are required to pay. If a penalty is assessed, there are administrative, appellate, and civil procedures to defend, remove, or abate penalties.
Often multiple penalties apply. For example, many taxpayers incur the failure to file and failure to pay penalties if they fail to file their tax returns. In addition, interest is imposed on the penalty itself, causing taxpayer’s liability to be vastly greater than the actual tax liability.
Our IRS attorneys are experienced in defending and removing penalties. We use a team approach across our tax, bankruptcy, and litigation attorneys to help you determine the best course of action. (Not discussed here are the criminal penalties that can be associated with various conduct related to your tax obligations.)
Individual Income Tax Penalties
Accuracy Related Penalties
The 20% accuracy related penalty is imposed on the underpayment of tax due to (1) Negligence or disregard of rules or regulations, (2) Substantial understatement of tax, (3) Substantial valuation misstatement (increased to 40% for gross valuation misstatement), (4) Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or (5) Undisclosed foreign financial asset understatement (40% in all cases).
Negligence includes any failure to make reasonable attempts to comply with the tax code. The understatement of tax is considered substantial if you understated your income by more than 10% of $5,000.00. Because substantial understatement is a bright line test, it is imperative that taxpayers fight assessments at the audit stage when possible and know the boundaries of the accuracy related penalty.
Failure to File Penalties
The failure to file penalty is assessed for each month or partial month from the date the tax return is due. The penalty is 5% per month, up to a maximum of 25%. In almost all cases, you will also be assessed, in addition to the failure to file penalty, a failure to pay penalty.
Failure to Pay Penalty
The failure to pay penalty is .05% for each month or partial month until the tax is paid. Note that an extension to file does not extend the time to pay tax. For example, if your tax return is due on April 15 and you file an automatic six-month extension until October 15, you still must pay at least 90% of the tax shown on your return when filed or you will pay a failure to pay penalty.
Civil Fraud Penalty
The civil fraud penalty is 75% of the tax that is due. It applies to all tax for the year, not only the tax that was due to fraud. Often, if an agent finds evidence of fraud, the case will be referred to the criminal investigation division (CID) of the Internal revenue service.
Frivolous Tax Return Penalty
If a taxpayer files a frivolous return, the penalty may be $5,000.00. Jointly file the return, and you and your spouse may be liable for $5,000.00 each. This penalty is added to other penalties. Many frivolous returns can be voided as the matter has been previously decided. Examples can be arguments of unconstitutionality of tax, improper control numbers, and other frivolous arguments.
Employer Related Penalties
Businesses can be subject to various employment related penalties for failure to deposit and pay 941, 940, or 944 taxes. It is important to understand that employers act as a fiduciary when they withhold from their employee’s paychecks – it’s not their money, so the IRS considers it stealing.
Failure to Deposit Penalty
A failure to deposit penalty is applied as follows: If you are between 1-5 days late, then the penalty is 2% of the underpayment. If you are between 6-15 days late, then the penalty is 5% of the underpayment. If you are over 16 days late, then the penalty is 10% of the underpayment. Once the IRS sends you a notice of nonpayment, you have 10 days to pay the tax before the penalty increases to 15%.
Failure to File Penalty
If you fail to file your returns timely, the penalty is 4.5% per month up to a maximum of 22.5%. Note that the failure to deposit penalty and the failure to pay penalty are in addition to this penalty.
Failure to Pay Penalty
The IRS imposes a failure to pay penalty in addition to the failure to pay and failure to file penalties. The penalty is .05% per month, which is increased to 1% per month after the IRS sends a notice of intent to levy. The maximum failure to pay penalty is 25%.
Interest is charged on all amounts required to be deposited, as well as on any penalty.
Trust Fund Recovery Penalty
The IRS may assess a trust fund recovery penalty against responsible persons for the business. This includes owners, bookkeepers, and others that are responsible for paying tax. The violation must be willful.
The penalty is the unpaid income taxes withheld, plus the employees portion of the withheld FICA taxes. Because the penalty is against you personally, your personal assets and income can ultimately be subject to levy and seizure.
Contact the tax lawyers at Robinson & Henry PC for a free consultation at (303) 688-0944. Our attorneys are experienced in handling a wide variety of tax penalty related issues.
Remember, past results are not a guarantee of results in future matters. Every case is unique, and we need to meet with you to discuss your options. The initial consultation is free.