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Penalties for the Federal Taxpayer

Posted on November 11, 2015 at 10:40 AM Comments comments (17383)

When the IRS or a state finds that you either should have filed a return or the return that you filed was filed in error you may be hit with a penalty.  Which penalty and how much it will add to your balance due depends on what the taxing authority finds in error on your return.

Failure to File:

This penalty is for just what it says.  If you were required to file a tax return but did not file on the due date, including extension, you may be hit with the Failure to File penalty.

  1. This is 5% of the unpaid balance per month with a maximum of 25%
  2. If it is more than 60 days late the penalty is the smaller of $135 or 100% of the tax due on the return.
  3. There is no Failure to File penalty if you are due a refund
  4. This penalty is reduced by the Failure to Pay penalty if both apply to the return.

Failure to Pay:

This penalty is for any balance due that was not paid by the due date of the return.  

  1. This is 0.5% of the unpaid balance per month to a maximum of 25%
  2. 0.25% of unpaid balance per month during the terms of an installment agreement.

Fraudulent Failure to File:

If the IRS determines that your Failure to File was due to a fraudulent act they can access a penalty of 15% of the unpaid balance per month with a maximum of 75%

Underpayment of Estimated Tax (Individuals and Corporations):

This is accessed on any individual or corporation if they do not pay enough estimated taxes into the government.  The rates change for inflation.  For corporations the rate also changes due to the amount of the underpayment.

Accuracy Related Penalty:

This is a 20% of the underpayment due to:

  1. Negligence
  2. Substantial understatement of tax
  3. Substantial valuation misstatement


If the IRS determines that you filed a fraudulent return there is a 75% of the understatement penalty due to the fraud.

Frivolous Tax Court Suits:

There is up to a $25,000 for the intentional delay, frivolous or groundless positions, and failure to pursue available administrative remedies to a tax issue.

Tax Evasion:

If you are hit with this, it is considered a willful attempt to evade tax and is a felony.  Maximum fine is $250,000 ($500,000 for corporations) and/or up to 5 years in prison.

Failure to Collect or Pay Over Tax:

Willful failure to collect, account for, and pay over tax is a felony with a maximum fine of $250,000 ($500,000 for corporations) and/or up to 5 years in prison.  These include payroll taxes for your employees that you have in a trust fund account.

Perjury and Fraud:

If you knowingly file or help file a false return or aid in the fraud, it is considered a felony.  This also carries a maximum fine of $250,000 ($500,000 for corporations).  The jail time can be added to include up to 3 years.

Earned Income Credit Claimed When Not Eligible:

  1. If the error is due to recklessor intentional disregard for the rules.  The taxpayer is not allowed to take the credit for 2 years even when they are eligible for the credit.
  2. If the error is due to fraud.  The taxpayer is not allowed to take the credit for 10 years, even if eligible.

As you can see there are many ways to be hit with a penalty on your tax return.  All of the penalties and amounts listed above are at the Federal level.  Each state has their own rates and penalties to consider.  It is always better to excercise the laws when filing your tax return then to be hit with any penalties at a later date.  The IRS can levy your home and business as well as garnish your wages until the unpaid amounts are paid in full.  My advice is to do your research, hire a knowledgeable tax preparer, or know that laws BEFORE filing your own return.  Getting out of a tax mess is more expensive then staying out of a tax mess to begin with!

There is a way to mitigate the noncriminal penalties.  This is can be done with "Reasonable Cause".  Reasonable cause is based on the facts and circumstances in each case.  Any reason that establishes that a taxpayer exercised ordinary care and prudence but still failed to comply with the tax law may be considered for relief.  

For more information on penalties see the IRS website and publication 17" target="_blank">http://