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The law imposes penalties
to ensure that all taxpayers pay their taxes. Some of these penalties
are discussed below. If you have underpaid your taxes due to fraud, you
may be subject to a civil fraud penalty. In certain cases, you may be
subject to criminal prosecution.
Failure-to-file penalty:
If you do not file your return by the due date (including extensions),
you may have to pay a failure-to-file penalty. The penalty is
5% of the tax not paid by the due date for each month or part of a
month that the return is late. This penalty cannot be more than 25%
of your tax, but it is reduced by the failure-to-pay penalty (will
be discussed next) for any month both penalties apply. However,
if your return is more than 60 days late, the penalty will not
be less than $100 or 100% of the tax balance, whichever is less. You
will not have to pay the penalty if you can show reasonable cause for
not filing on time.
Failure-to-pay penalty: You may have to pay a
penalty of 1/2 of 1% of your unpaid taxes
for each month or part of a month after the due date that the tax
is not paid. This penalty cannot be more than 25% of your unpaid tax.
You will not have to pay the penalty if you can show good reason
for not paying the tax on time.
Penalty for frivolous return:
You may have to pay a penalty of $500 if you file a return that
does not include enough information to figure the correct tax or shows
an incorrect tax amount due to:
- A frivolous position on
your part or
- A desire to delay or interfere with the
administration of federal income tax laws.
This penalty is in addition
to any other penalty provided by law.
Accuracy-related penalty:
An accuracy-related penalty of 20% applies to any underpayment due to:
- Negligence or disregard of rules or regulations or
- Substantial understatement of income tax.
This penalty also applies
to conditions not discussed here. Even though an underpayment was due
to both negligence and substantial underpayment, the total
accuracy-related penalty cannot exceed 20% of the underpayment. The
penalty is not imposed if there is reasonable cause accompanied
by good faith.
Negligence: Negligence
includes the lack of any reasonable attempt to comply with provisions
of the Internal Revenue Code.
Disregard: Disregard
includes the careless, reckless, or intentional disregard of rules
or regulations.
Substantial understatement of income tax: For an
individual, income tax is substantially
understated if the understatement of tax exceeds the greater of:
- 10% of the correct tax or
- $5,000.
Information reporting penalties:
Any person who does not file an information return or a complete
and correct information return with the IRS by the due date is subject
to a penalty for each failure. A penalty applies to information returns
as follows:
- Correct information returns
filed within 30 days after the due date, $15 each.
- Correct information returns filed after
the 30-day period but by August 1, $30 each.
- Information returns not filed by August
1, $50 each.
Maximum limits apply to
all these penalties.
Failure to furnish correct
payee statements: Any person who does not provide a taxpayer with a
complete and correct copy of an information return (payee
statement) by the due date is subject to a penalty of $50 for each
statement. If the failure is due to intentional disregard of the
requirement, the penalty is the greater of:
- $100 per statement or
- 10% or 5% (depending on the type of
statement) of the amount to be shown on the statement.
Identification numbers and
other information: Any person who does not comply with other
specified reporting requirements, including the use of correct
identification numbers (employer identification numbers and social
security numbers), is subject to a penalty of $50 for each failure.
The law provides penalties
for failure to file returns or pay taxes as required.
Civil
Penalties
If you do not file your
return and pay your tax by the due date, you may have to pay a
penalty. You may also have to pay a penalty if you substantially
understate your tax, file a frivolous return, or fail to supply your
social security number. If you provide fraudulent information
on your return, you may have to pay a civil fraud penalty.
Filing late: If you do not file your return by the
due date (including extensions), you may have to pay a failure-to-file
penalty. The penalty is
based on the tax not paid by the due date (without regard to
extensions). The penalty is usually 5% for each month or part of a
month that
a return is late, but not more than 25%.
Fraud: If your failure
to file is due to fraud, the penalty is 15% for each month or part of a
month that your return is late, up to a maximum of 75%.
Return over 60 days late:
If you file your return more than 60 days after the due date or
extended
due date, the minimum penalty is the smaller of $100 or 100% of the
unpaid tax.
Exception: You will
not have to pay the penalty if you show that you failed to file
on time because of reasonable cause and not because of willful neglect.
Paying tax late: You will have to pay a
failure-to-pay penalty of 1/2 of 1% of your unpaid taxes for each
month, or part of a month, after the due
date that the tax is not paid. This penalty does not apply during
the extension period available by filing Form 4868, Application
for Automatic Extension of Time To File U.S. Individual Income Tax
Return, if you paid at least 90% of your actual tax liability before
the original due date of your return through withholding on wages,
estimated tax payments, or a payment sent in with Form 4868.
If a notice of intent to
levy is issued, the 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 a notice and demand for immediate payment is issued, the
rate will increase to 1% at the start of the first month beginning
after the day that the notice and demand is issued.
This penalty cannot be
more than 25% of your unpaid tax. You will not have to pay the
penalty if you can show that you had a good reason for not paying your
tax on time. This failure-to-pay penalty is added to interest charges
on late payments.
Combined penalties: If both the failure-to-file
penalty and the failure-to-pay
penalty (discussed earlier) apply in any month, the 5% (or 15%)
failure-to-file penalty is reduced by the failure-to-pay penalty.
However, if you file your return more than 60 days after the due
date or extended due date, the minimum penalty is the smaller of $100
or 100% of the unpaid tax.
Accuracy-related penalty:
You may have to pay an accuracy-related penalty if:
You underpay your tax
because of either "negligence" or
You "disregard" the rules or regulations
or
You substantially understate your income
tax.
The penalty is equal to 20% of the
underpayment. The penalty will not be figured on any part of an
underpayment on which a fraud penalty (discussed later) is charged.
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. Negligence also includes failure to keep adequate
books and records. You will not have to pay a negligence penalty if you
have a reasonable basis for a position you took.
The term "disregard" includes any
careless, reckless, or intentional disregard.
The penalty is based on the part of the
underpayment due to negligence or disregard of rules or regulations,
not on the entire underpayment on the return.
Adequate disclosure: You can avoid
the penalty for disregard of rules or regulations if you adequately
disclose on your return a position that has at least a reasonable
basis. See Disclosure statement, later.
Substantial understatement of income
tax: You understate your tax if the tax shown on your return is
less than the correct tax. The understatement is substantial if it is
more than the larger of 10% of the correct tax or $5,000. However, the
penalty is reduced to the extent there is:
- Substantial authority or
- Adequate disclosure and a reasonable
basis.
Substantial authority: Whether
there
is or was substantial authority for the tax treatment of an item
depends on the facts and circumstances. Consideration will be given
to 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 as yours.
Disclosure statement: The
understatement may also be reduced if you have adequately disclosed the
relevant facts about your tax treatment of an item. To make this
disclosure, use Form 8275, Disclosure Statement. You must also have a
reasonable basis for treating the item the way you did.
In cases of substantial understatement
only, items that meet the requirements of Revenue Procedure 96-58 (or
later update)are considered adequately disclosed on your return without
filing Form 8275.
Use Form 8275-R, Regulation Disclosure
Statement, to disclose items or positions contrary to regulations.
Reasonable cause: You will not have
to pay a penalty if you show a good reason (reasonable cause) for the
way you treated an item. You must also show that you acted
in good faith.
Frivolous return: You may have to
pay a penalty of $500 if you file a frivolous return. A frivolous
return is one that does not include enough information to figure the
correct tax or that contains information clearly showing that the tax
you reported is substantially incorrect.
You will have to pay the penalty if you
filed this kind of return because of a frivolous position on
your part or a desire to delay or interfere with the administration of
federal income tax laws. This includes altering or striking out the
preprinted language above the space provided for your signature.
This penalty is added to any other
penalty provided by law.
The penalty must be paid in full upon
notice and demand from IRS even if you protest the penalty.
Fraud: If there is any underpayment
of tax on your return due to fraud, a penalty of 75% of the
underpayment due to fraud will be added to your tax.
Joint return: 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.
Failure to supply social security
number: If you do not include your social security number (SSN) or
the SSN of another person where required on a return, statement, or
other document, you will be subject to a penalty of $50 for each
failure. You will also be subject to the penalty of $50 if you do not
give your SSN to another person when it is required on a return,
statement, or other document.
For example, if you have a bank account
that earns interest, you must give your SSN to the bank. The
number must be shown on the Form 1099-INT or other statement the
bank sends you. If you do not give the bank your SSN, you will be
subject to the $50 penalty. (You also may be subject to "backup"
withholding of income tax. See chapter 5.)
You will not have to pay the penalty if
you are able to show that the failure was due to reasonable
cause and not willful neglect.
Failure to furnish tax shelter
registration number: A person who sells (or otherwise transfers) to
you an interest in a tax shelter must give you the tax shelter
registration number or be subject to a $100 penalty. If you claim any
deduction, credit, or other tax benefit because of the tax shelter, you
must attach Form 8271, Investor Reporting of Tax Shelter Registration
Number, to your return to report this number. You will have to pay
a penalty of $250 for each failure to report a tax shelter registration
number on your return. The penalty can be excused if you have a
reasonable cause for not reporting the number.
Criminal
Penalties
You may be subject to criminal prosecution
(brought to trial) for actions such as:
- Tax evasion,
- Willful failure to file a return or
- Supply information or
- Pay any tax due or
- Fraud and false statements or
- Preparing and filing a fraudulent return
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