- Overview: Learn about IRS penalties and interest, including the penalty for not filing taxes, the IRS underpayment penalty, the IRS underreporting penalty, and the penalty for filing a false claim on your federal tax return.
- Problems: Understand the problems associated with IRS penalties and interest.
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Solutions: The W.L. Henry law firm’s goal is to solve your tax debt problems. Find out how the firm works hard to abate taxpayers’ IRS penalties.
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Schedule an Appointment: Schedule a free consultation with a tax lawyer. Colorado office locations are conveniently located in Castle Rock and Colorado Springs. We offer a free phone consultation if you reside outside the Denver or Colorado Springs metro area or in another state or country.
Overview
Among the civil penalties assessed by the IRS include the following: failure to file a timely return, failure to pay tax, failure to pay an assessed tax (delinquency penalties); failure to pay estimated income tax; failure to make a deposit of taxes; accuracy-related penalties; the fraud penalty; failure to pay over collected taxes; filing a frivolous return; failure to file information returns; and failure to furnish correct information returns. If a husband and wife file a joint return, they assume joint and several liability for the payment of the single tax, including penalties and interest.
Note: the following figures are of a general nature and not specific legal advice. Penalties are often cumulative, so more than one penalty may apply to your situation. Contact an attorney to discuss your specific IRS problems.
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Failure to file and pay (penalty for not filing taxes): The penalty for not filing taxes is 5% per month of the outstanding tax liability and any additions to tax (4.5% failure to file penalty and a .05% failure to pay penalty) for a maximum penalty of 25%. If the taxpayer has not paid after 5 months, the .05% failure-to-pay penalty continues to accrue up to 25% until the tax is paid. So, the total penalty for not filing taxes may be as high as 47.5% of the tax due (22.5% late filing penalty and 25% IRS underpayment penalty). The 47.5% penalty does not include interest due on the tax or other penalties that may be cumulative to the failure to file and failure to pay penalty. The penalty for failing to file taxes if the failure to file the tax return was fraudulent is 15% per month up to a total of 75%.
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Accuracy Related Penalties: The IRS accuracy related penalty (sometimes informally called an IRS underreporting penalty or as an IRS underpayment penalty) is 20% of the tax underpayment; however, the accuracy related penalty is only applied if the underpayment is attributable to one of the following: negligence or disregard of rules or regulations, substantial understatement of income tax, a substantial overstatement of pension liabilities, a substantial valuation overstatement, or a substantial estate or gift tax valuation understatement. In other words, the underpayment must be attributable to one of the five foregoing categories for an accuracy related penalty to apply.
Negligence is the failure to make a reasonable attempt to comply with the Internal Revenue Code or a position lacks a reasonable basis. The IRS will consider negligence strongly indicated if a taxpayer omits from an income tax return income that a third party shows on an information return; a taxpayer fails to make a reasonable attempt to determine the correctness of a deduct, credit, or exclusion, which would seem too good to be true; or the failure of certain partners in a partnership or shareholders in an S corporation to report items consistently with the partnership or S corporation. Thus, if an IRS underpayment penalty is imposed because of a taxpayer’s negligence, it may be an accuracy related penalty.
A substantial understatement occurs if there is an understatement that exceeds the greater of 10% of the tax required to be shown on the return for the tax year or $5,000 ($10,000 for corporations).
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Civil Fraud Penalty: Generally, the IRS can impose the civil fraud penalty if it can prove that the taxpayer had the fraudulent intent to evade taxes. The penalty is 75% of the tax not paid due to fraud. For example, the civil fraud penalty for filing a false claim on your federal taxes, if the IRS proves the false claim was fraudulent, is 75% of the amount of the underpayment caused by the false claim. Complex rules apply to the civil fraud penalty to determine what portion of the underpayment is due to fraud. Neither death nor bankruptcy will discharge any individual from any debt due to fraud. Only in egregious situations will the IRS attempt to impose a fraud penalty for not filing taxes.
The policy of the IRS is to not recommend criminal prosecution of individual for failing to file their tax returns if they make arrangements before being notified that they are under criminal investigation. If you are having tax problems and fear criminal sanctions for filing a false claim on your federal taxes, please contact your tax lawyer immediately.
- Interest: the interest rate for failing to pay taxes is the federal short-term rate plus three percent, adjusted every three months. Interest runs from the due date of the return to the date of payment. It is extremely difficult to get interest abated.
- Employment Tax Penalties: A penalty for the failure to turn over employment or payroll taxes to the IRS is called a Trust Fund Recovery Penalty. A Trust Fund Recovery Penalty equals 100% of the tax required to be deposited.
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Problems
IRS Penalties and interest can quickly amount to more than the original tax liability. After the penalty is assessed, the IRS can place a levy on your wages or bank accounts or file a federal tax lien against your home to collect the assessed tax. Spouses filing a joint return will be jointly and severally liable for the penalties and interest.
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Solutions
Taxpayers may be able to avoid paying penalties or interest. Among the possible defenses include demonstrating reasonable cause, innocent spouse relief, disclosure, establishing a mistake, negating intent, establishing substantial authority for the return position, or through an offer in compromise. The W.L. Henry law firm examines a variety of defenses and assists all taxpayers in reducing and eliminating their tax liabilities, whether imposed by the IRS, Colorado Department of Revenue, New Jersey Division of Taxation, or the Virginia Department of Taxation. Please contact your tax lawyer to discuss your specific penalty abatement situations.
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Schedule an Appointment
Schedule a free consultation to discuss your case with a tax lawyer. Colorado office locations are conveniently located in Castle Rock and Colorado Springs. If you are out-of-state or out-of-country, a telephone conference can be scheduled. All initial consultations by phone or in one of our Colorado offices are free.
Even if you are not sure if you need a tax lawyer, the firm is happy to discuss your tax issues and point you in the right direction.
Schedule a free consultation:
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