The IRS has at its disposal various penalties for taxpayers who fail to comply with the tax laws. Below are some of the more common IRS penalties for taxpayers to be aware of.
Failure to File Tax Returns: A failure to file any tax return within the time prescribed by the tax law may result in a penalty. The failure-to-file penalty will not be imposed when the taxpayer can show that the failure to file was due to reasonable cause and not to willful neglect.
Failure to Pay Tax: A penalty is imposed for failure to pay, when due, those taxes (other than estimated taxes) shown by a taxpayer on a return, unless the failure is due to reasonable cause. A penalty is also imposed on additional taxes determined to be due on audit for which the IRS has made a demand for payment.
NOTE: An automatic extension of time to file a tax return is not an extension of time to pay tax due under the return.
Frivolous Return Penalty: There is a penalty for filing a frivolous tax return. A frivolous tax return is one that omits necessary information to determine the taxpayer's tax liability, shows a substantially incorrect tax, is based upon a frivolous position, or is based upon the taxpayer's desire to impede the collection of tax.
Information Reporting Penalties: Three categories of penalties apply to Failures to File required Information Returns and Payee Statements-
- Failure to file an information return or to include correct information on an information return.
- Failure to file a payee statement or to include correct information on a payee statement
- Failure to comply with other information reporting requirements.Common examples are failing to file and furnish W-2's & W-3'S, 1099 Miscellaneous Income & 1096 Forms, Schedule K-1, missing Social Security Numbers, etc.Underpayment of Tax (Accuracy Related Penalties): Accuracy related penalties are imposed on the portion of any underpayment of tax that is due to:
- Negligence or Disregard of Tax Rules and Regulations
- Substantial Understatement of Income Tax
- Underpayment of Tax Due to Undisclosed Foreign Financial Assets
- Fraud.Abatement of Penalties:Requesting an abatement of IRS penalties requires that the taxpayer show “reasonable cause”. What constitutes reasonable cause generally depends on the facts and circumstances. Common examples may include a death, disability, major illness, natural disaster, destroyed or stolen tax records,and other issues beyond the taxpayer's control. Taxpayers generally must request an abatement of penalties in a written letter to the IRS detailing the facts and circumstances of the situation.UNDERPAYMENTS OF TAX-IRS INTERESTInterest on Underpayment of Tax: Interest on underpayments of tax, including underpayments of estimated tax, is imposed on underpayment of tax. Interest accrues from the date the payment was due, determined without regard to any extensions of time, until it is received by the IRS. Interest is compounded daily.Abatement Of Interest:The IRS has the authority to abate interest in cases where the additional interest was caused by IRS errors or delays. Taxpayers requesting an abatement of interest must file a separate Form 843 for each tax period for each type of tax involved.BOTTOM LINE:IRS Penalties and interest charges can become substantial in a very short period of time. The best strategy to avoid and or minimize penalties and interest charges is to fully comply with the tax laws and regulations in a timely manner.
This article was written by Donald M. Scherzi, CPA, CFP, LLCMike Lupo, SCORE CounselorVisit us at: www.scoresouthflorida.net