Understanding IRS Tax Penalties

Apr 21, 2022

Tax penalties can lead to many sleepless nights for taxpayers who owe the Internal Revenue Service (IRS).

Delinquent taxes are one thing, but IRS tax penalties can leave individuals and businesses owing far more than they were initially required to pay.

There are nearly 150 penalties in the Internal Revenue Code, but a few common mistakes cause most IRS tax penalties.

Here are some of the most common tax penalties for both individuals and businesses. Read on to learn how to avoid paying Uncle Sam an arm and a leg!

IRS Penalties for Late Tax Filing and Payments

One way or another, it seems like the tax deadline has a way of sneaking up on everyone. Taxpayers are encouraged to file by the tax deadline, but that doesn’t always happen.

IRS Failure to File Tax Penalty

If you were unable to file your personal tax return by the deadline or request an extension, the IRS charges a failure to file penalty.

The IRS failure to file penalty is 5% of the unpaid tax per month (capped at 25% of the tax due). After 60 days, the minimum IRS penalty is $435 or 100% of the tax due, whichever is less.

The best way to avoid a penalty for failing to file is to make sure your returns are filed before the due date or request an extension by the deadline. Requesting an extension gives taxpayers an additional 6 months to file their tax returns.

We highly recommend submitting tax returns on time even if you’re unable to pay the amount due. You can also submit a partial payment with your tax return to lessen the penalties.

IRS Failure to Pay Penalty

The IRS expects taxpayers to pay their tax in full by the April filing deadline—even if they receive an extension of time to file.

The IRS will assess a penalty for failure to pay the full balance on your tax return.

The IRS failure to pay penalty is 0.5% of the unpaid tax per month (not exceeding 25% of the tax due).

To make sure this doesn’t happen to you, it’s always best to pay the total tax due before the deadline. If you’re unable to pay the full amount, it’s best to pay as much as possible by the deadline and pay the remaining balance shortly after.

Late Filing Tax Penalties for Businesses

The tax return due date for personal tax returns is generally April 15, but in some cases, the due dates for businesses can vary.

The IRS sets tax return due dates for each type of business structure. The filing date is also the payment date:

  • Schedule C filings (pass-through income): April 15
  • Partnership income tax return: March 15
  • S-corporation: March 15

The IRS failure to file tax penalty for S-corporations and partnerships is $195 per shareholder/partner per month (maximum of 12 months).

For small business owners, partnerships, and corporations, the tax due dates can fly by without proper preparation. It’s best to consult with a professional to ensure you file accurately and on time.

IRS Interest on Unpaid Tax

On top of being hit with penalties, the IRS charges interest on unpaid taxes, regardless of the cause.

Interest is calculated based on how much tax you owe, and for each day, it’s not paid in full. These rates are determined every 3 months and can vary based on the type of tax owed.

Accuracy-Related Tax Penalties

The IRS requires taxpayers to complete accurate tax returns and pay the full amount of tax owed. The accuracy related tax penalty is assessed when there are non-deliberate mistakes made when filing annual returns.

The 2 most common accuracy-related penalties causes are:

  • Negligence or disregard of the rules or regulations
  • Substantial understatement of income tax

Negligence refers to an individual who does not make any reasonable attempt to accurately file their tax returns. On the other hand, disregard relates to individuals who intentionally ignored tax rules.

The IRS invokes the substantial understatement penalty against individuals when the tax liability is understated by 10% or $5,000, whichever is greater.

The accuracy-related tax penalty is 20% of the underpayment.

The best way to avoid accuracy-related penalties from the IRS is to work with a trusted tax professional. For some taxpayers, filing on your own can be simple. It gets complicated for individuals who also own a business, invest in stocks or cryptocurrency, or have offshore accounts.

IRS Tax Fraud Penalties

 The IRS can hand out severe civil and criminal tax fraud penalties to individuals found guilty of tax fraud.

Civil tax fraud penalties occur if the IRS believes there’s clear and convincing evidence that tax was underpaid due to fraud (for example, willfully leaving some income sources off your tax return).

Civil tax fraud penalties are handled directly by the IRS and are 75% of the underpayment portion due to fraud.

The penalty can be assessed after a tax audit, and the IRS does not need to open a criminal investigation.

Criminal tax fraud penalties are handled by IRS Special Agents who launch a special investigation to prove a taxpayer committed fraud. If sufficient evidence is found, they can refer the case to the Department of Justice for criminal prosecution.

Criminal tax fraud penalties include:

  • A felony charge
  • Up to $100,000 in fines ($500,000 for corporations)
  • And up to 5 years in prison per violation

Relief for IRS Tax Penalties

If you’re in deep with the IRS, there may be light at the end of the tunnel. The IRS offers penalty abatement if there has been an effort to comply with tax law.

The following are types of tax relief offered depending on the penalty:

  • First-time penalty abatement
  • Administrative waiver
  • Reasonable cause
  • Statutory exception

Failure to pay and failure to file penalties generally require abatement by the IRS. This is due to the electronic system used by the IRS to monitor submitted tax returns and balance payments.

Many taxpayers miss out on tax penalty relief simply because they don’t ask for it. The IRS also denies many initial penalty abatement requests, but you shouldn’t stop after one denial. Our experienced tax attorneys can help!

A Tax Lawyer Can Help You Get Relief

Taxpayers have a right to challenge IRS decisions in court. Our experienced team of tax attorneys can help you through the process.

If you find yourself in trouble with the IRS, contact Gordon Law Group to get help today!

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