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CIVIL PENALTIES
Federal tax law provides penalties for
failure to file returns or pay taxes as
required. If a taxpayer fails to file a
return and pay the tax owed by the due
date, the taxpayer may incur a penalty.
A taxpayer may also incur a penalty if
the taxpayer substantially understates
or underpays
the taxpayer's tax owed, understates a
reportable transaction, files an
erroneous claim for refund or credit,
files a frivolous tax return, or fails
to supply the taxpayer's Social Security
Number or taxpayer identification
number. If a taxpayer provides
fraudulent information on the taxpayer's
return, the IRS will impose a civil
fraud penal
Late Filing. If a taxpayer does not file the taxpayer's return by the
due date (including extensions), the
IRS will impose a failure-to-file
penalty. The penalty is usually 5% for
each month or part of a month that a
return is late, but not more than 25%.
The penalty is based on the tax not paid
by the due date (without regard to
extensions).
Fraud. If the taxpayer's failure to file is due to fraud, the penalty is 15%
for each month or part of a month that
the taxpayer's return is late, up to a
maximum of 75%.
Return over 60 Days Late. If a taxpayer files the taxpayer's return more than
60 days after the due date or extended
due date, the
IRS will impose a minimum penalty equal
to the lesser of $100 or 100% of the
unpaid tax.
Exception. A taxpayer may avoid the penalty if the taxpayer shows that the failure
to file on time was due to a reasonable
cause and not because of willful
neglect.
Late Payment. The IRS will impose a failure-to-pay penalty of 1%
(.50%) of the taxpayer's unpaid taxes
for each month, or part of a month,
after the due date that a taxpayer has
failed to pay tax owed. The late-payment
penalty does not accrue during the
automatic 6-month extension of time to
file period if the taxpayer paid at
least 90% of the taxpayer's actual tax
liability on or before the due date of
the taxpayer's return and pay the
balance upon filing a return.
If the IRS issues a notice of intent to
levy, the penalty rate will increase to
1% at the start of the first month
beginning at least 10 days after the day
that the notice is issued. If the IRS
issues a notice and demand for immediate
payment, the penalty rate will increase
to 1% at the start of the first month
beginning after the day that the notice
and demand is issued.
The late-payment penalty cannot be more
than 25% of the taxpayer's unpaid tax. A
taxpayer may avoid the penalty if the
taxpayer shows that the failure to file
on time was due to a reasonable cause
and not because of willful neglect.
Combined Penalties. If a taxpayer incurs both the failure-to-file penalty and
the failure-to-pay penalty in any month,
the 5% (or 15%) failure-to-file penalty
is reduced by the failure-to-pay
penalty. If a taxpayer files the
taxpayer's return more than 60 days
after the due date or extended due date,
the
IRS will impose a minimum penalty equal
to the smaller of $100 or 100% of the
unpaid tax.
Accuracy-related Penalty. The
IRS will impose an accuracy-related
penalty if an taxpayer underpays tax due
to:
The
accuracy-related penalty is equal to 20%
of the underpayment. The penalty will
not be computed on any part of an
underpayment which is subject to the
fraud penalty.
Negligence or Disregard.
The term 'negligence' includes a failure
to make a reasonable attempt to comply
with the tax law or to exercise ordinary
and reasonable care in preparing a
return, or the failure to keep adequate
books and records. The term
"disregard"
includes any careless, reckless, or
intentional disregard. A taxpayer may
avoid the negligence penalty if the
taxpayer has a reasonable basis for a
position taken on a tax return.
Adequate Disclosure. A taxpayer may avoid the penalty for disregard of rules or
regulations if the taxpayer adequately
discloses the position on the taxpayer's
return and such position and the
taxpayer had a reasonable basis for the
position. This exception will not apply
to an item that is attributable to a tax
shelter, or if a taxpayer fails to keep
adequate books and records.
Substantial Understatement. A taxpayer understates tax if the tax shown on the
taxpayer's return is less than the
correct tax. The understatement is
substantial if the understatement is
more than the greatest of 10% of the
correct tax or $5,000. The
IRS may reduce the amount of the understatement if the
understatement is due to reliance on
substantial authority, or if the
taxpayer made adequate disclosure of the
position and had a reasonable basis for
such position.
If an item on the taxpayer's return is
attributable to a tax shelter, there is
no reduction for an adequate disclosure.
The IRS may reduce the substantial
understatement penalty if the taxpayer
reasonably believed that the tax
treatment reported on the return was
more likely than not the proper
treatment.
Substantial Authority. Whether substantial authority for the tax treatment
exists depends on an analysis of all
relevant tax authorities including:
court opinions, Treasury regulations,
revenue rulings, revenue procedures, and
notices and announcements issued by the
IRS and published in the Internal
Revenue Bulletin that involve the same
or similar circumstances.
Disclosure Statement. A taxpayer should use the Form 8275, Disclosure Statement,
to adequately disclose the relevant
facts about the tax treatment of an item
that might otherwise incur penalties for
substantial understatement.
Reasonable Cause. A taxpayer may avoid a penalty if a taxpayer shows that the
taxpayer acted in good faith and had a
reasonable cause for the tax reporting
of a particular item.
Frivolous Tax Filing.
A taxpayer may incur a penalty of $5,000 if the taxpayer
files a frivolous tax return or other
frivolous submissions. A frivolous tax
return is a return that does not include
enough information to compute the
correct tax or that contains information
that clearly shows that the tax the
taxpayer reported is substantially
incorrect. The frivolous-tax-filing
penalty is added to any other applicable
penalty.
Failure to supply social security number.
If a taxpayer does not include the
taxpayer's Social Security Number
(SSN),
Employer Identification Number
(EIN) or
Taxpayer Identification Number (TIN)
on a return, statement, or other
document, the taxpayer will be subject
to a penalty of $50 for each failure. A
taxpayer will also be subject to a
penalty of $50 if the taxpayer does not
give the taxpayer's
SSN to another person when it is required on a return,
statement, or other document. A
taxpayer will not incur the penalty if
the taxpayer is able to show that the
failure was due to reasonable cause and
not willful neglect.
Erroneous Claim for Refund or Credit.
A taxpayer may incur a penalty if the
taxpayer files an erroneous claim for
refund or credit. The penalty is equal
to 20% of the disallowed amount of the
claim, unless the taxpayer can show a
reasonable basis for the tax treatment
of such item. The penalty will not be
incurred on any part of the disallowed
amount on which the accuracy-related or
fraud penalties are charged.
Fraud. A taxpayer will incur a penalty equal to 75% of the taxpayer's tax
liability for any underpayment of tax
due to fraud. The fraud penalty on a
joint return does not apply to a spouse
unless some part of the underpayment is
due to the fraud of that spouse.
CRIMINAL PENALTIES
A taxpayer may be subject to
criminal prosecution for actions such
as:
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Tax evasion,
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Willful failure to file a return, supply
information, or pay any tax due,
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Fraud and false statements, or
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Preparing and filing a fraudulent
return.
CONTACT US
To speak to a
tax
attorney about preparing for an IRS
inquiry or audit,
please contact us
here or call 713.650.9700.
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