The fines and penalties associated with late filing, underpayment and inaccurate returns aren't generally draconian -- but they can be confusing.
Essentially, the Internal Revenue Service exerts its discipline much the way a parent would -- a slap on the wrist for inconsequential offenses, a slightly stronger punishment to prevent further (albeit minor) infractions, and the big guns for cases of intent to deceive. In almost all instances, the IRS has some discretion in how it assesses fines and penalties.
Unfortunately, the comparison is particularly apt, since so many taxpayers try pushing their limits, much the way children do. But perhaps a little knowledge of the consequences could serve as a deterrent ... or possibly just serve as more of a challenge.
In either case, here's a short list of the most common types of infractions and the penalties they carry. If you're curious about more details, check the unfailing J.K. Lasser's
Your Income Tax
. But if you're more worried than curious, you might want to check with a tax attorney.
If you file your return after April 15 without having filed
an extension, the IRS may impose a penalty of 5% of the net tax due for each month the return is late, with a maximum penalty of 25%. If the penalty is more than 60 days late, though, the penalty will be 100% of the tax due
$100. If the IRS finds the failure to file due to fraud, the monthly penalty is 15% of the net tax due, with a maximum penalty of 75%.
In most cases, though, if the late return does not reflect any tax due, the IRS will waive the penalty.
Any tax owed but not paid by April 15 will have a 0.5% monthly penalty imposed on the outstanding amount, with a maximum of 25%.
If you file an extension and by the original due date have paid at least 90% of your total tax liability (be it through employer withholding, estimated tax payments or a check sent with your extension request), the penalty will not apply to the remainder of tax owed.
In the case of more egregious errors -- those resulting in additional tax owed because the return was simply
-- the IRS will assess a 20% penalty on the outstanding tax. The penalty may be avoided if you can show reasonable cause or somehow demonstrate that it was an honest mistake -- believe it or not, the IRS does understand that mistakes do happen. But the IRS has determined four categories of "inaccurate returns" that would incur the 20% penalty:
Negligence or disregard of IRS rules.
Negligence is defined as making a reasonable attempt to comply with the law. While the IRS routinely corrects simple (and innocent) mistakes, "negligence and disregard" implies some sort of willfulness. So a simple math error, or even a mistake arising from failing to understand the extraordinarily complex earned-income-tax credit, might be excused. But you won't avoid the penalty by claiming "Oh, I didn't know I was supposed to report
Substantial understatement of tax.
If you underpay your taxes because you've understated the tax you owe, the difference between what you've paid and the tax you actually owe will also be subject to the 20% penalty. Again, though, the penalty only applies to egregious understatements -- if the tax is understated by either $5,000 or 10% of the proper tax.
You can avoid the penalty if you have legal support, such as statutes, court decisions, IRS regulations, revenue rulings and procedures, and notices in the IRS bulletin.
Overvaluing property or basis.
If you inflate the amount of a charitable contribution by more than 200% of the correct amount, the resulting increase in tax
be subject to the 20% penalty. The penalty will only apply if the tax underpayment exceeds $5,000, although if the value is overstated by more than 400% of the correct value, the penalty rate is doubled to 40%. (The same rules apply when overstating the basis of depreciated property.)
With a qualified appraisal and your own good-faith investigation of value, the penalty can be disputed.
Undervaluation on gift or estate tax return.
If you've undervalued property on a gift or estate tax return by 50% or more
if the resulting tax underpayment exceeds $5,000, the 20% penalty will be applied. The penalty doubles to 40% if the undervaluation is 75% or more.
If the IRS establishes that the reason for underpayment is fraud, the entire balance will be subject to a 75% penalty.
When you can breathe easy.
The IRS has three years from the due date of a return to assess additional taxes. But if the IRS cannot complete an audit within three years, it can request that you sign Form 872 to extend the time for assessing the tax.
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