An Introduction to Tax Penalties

There are numerous tax penalties that the IRS imposes for tax code violations. Here is a brief summary of the four most common ones.

When you receive an IRS tax bill, it is usually accompanied by interest and penalties, which may be significant. The next few posts will describe when these penalties apply, and arguments that can be made to have them reduced or removed entirely.

Late filing penalty

The IRS failure-to-file penalty under 26 U.S. Code § 6651(a)(1) is imposed when a taxpayer does not file their taxes on time. The IRS late filing penalty is 5% of the unpaid taxes per month (or part of the month) that the return is filed late, up to a total of 25% of the unpaid taxes due.

Late payment penalty

The IRS failure-to-pay penalty under 26 U.S. Code § 6651(a)(2) is imposed when a taxpayer does not pay their taxes by the due date, and amounts to 0.5 to 1% of the unpaid tax bill for each month (or part of the month) that the taxes are not paid, up to 25% of the unpaid taxes due.

Note that if the IRS late filing penalty also applies, this amount will be reduced. However, if a return is filed more than 60 days after the due date, the minimum penalty is $135 or 100% of the unpaid tax, whichever is less, unless the taxpayer can show that the failure to file or to pay is due to “reasonable cause” or some other reason that warrants tax relief.

Accuracy-related penalty

Under 26 U.S. Code § 6662, the IRS can impose a tax penalty for negligence, for any substantial understatement of tax or valuation misstatement, or for overstating pension liabilities. The IRS accuracy-related penalty may also be imposed for undisclosed foreign financial asset understatements and for reporting transactions that lack economic substance. The penalty is equal to 20% of the amount of the underpayment.

Civil fraud penalty

If the IRS finds that income has been underreported with fraudulent intent (meaning, it was not an honest mistake), a fine of 75% of the amount of the underpayment will be imposed per 26 U.S. Code § 6663. The IRS civil tax fraud penalty is applied to less than 2% of audits, and a handful of taxpayers may be charged with criminal tax fraud as well.

Assistance with resolution of your tax dispute

There are many ways of obtaining tax penalty relief and an experienced tax attorney can assist. Moskowitz, LLP is a full service tax law firm that represents clients in tax matters before the IRS and all state and local taxing agencies. Contact our office today for a consultation.

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