Tax Penalties: Quick Reference Guide

One of the most dreaded times of the year for many Americans rolls around on April 15, with the deadline for filing income tax returns. This article provides a quick reference guide to the potential consequences of not filing a return or not paying your taxes on time. In-depth information on each penalty follows below, or just click on the links to jump to more information.

[FOR PUBLISHING: ANCHOR LINKS]

• Timely Filers Who Do Not Pay Total Due: one-half of 1% of the tax owed for each month until the tax is paid (25% maximum)
• Late Filers: 5% of the tax owed for each month late (up to 25%); increased penalties for fraud
• Combined Penalties: if both of the above apply, the failure-to-file penalty minus the failure-to-pay penalty
• Frivolous Tax Submissions: up to $25,000 penalty
• Negligence: 20% of the underpayment
• Civil Fraud: 75% of the underpayment
• Criminal Penalties: civil fraud penalty (75%), plus fines and possible jail time
• Interest: for all late or under-paying filers, interest will compound daily on their unpaid taxes at the federal short term rate plus 3%

Timely Filers Who Do Not Pay the Full Amount Due

If someone files on time but doesn't pay the full amount they owe on time, they will usually have to pay a late payment penalty of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or up to a 25% maximum penalty is applied. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy.

In some cases, you can negotiate for an installment agreement with the IRS to pay off back taxes. For individuals who file by the return due date, the one-half of one percent rate decreases to one-quarter percent for any month in which an installment agreement is in effect.

Frivolous Tax Arguments

There are a lot of common arguments for why a taxpayer should not have to pay taxes on certain income. This ranges from the claims that federal income taxes are unconstitutional to sovereign citizen claims. These claims have been rejected by the courts.

If the taxpayer failed to pay taxes or delayed payment based on an identified frivolous tax position, the tax court can impose a penalty of up to $25,000. (See 26 U.S.C. section 6673.)

Negligent Tax Return Mistakes

You may have to pay a penalty if you file an erroneous claim for a refund or credit. This occurs in circumstances where a taxpayer:

1. Shows negligence or disregard of the rules or regulations, or
2. Substantially understates their income tax.

The penalty is equal to 20% of the underpayment, unless the taxpayer adequately provides a reasonable basis for the way they treated the item at issue, or their position was supported by substantial authority. (See 26 U.S.C. section 6662.)

Civil Tax Fraud

The penalties get significantly worse for fraudulent underpayments. If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud can be added to your tax. (See 26 U.S.C. section 6663.)

Criminal Penalties for Tax Fraud

All of the above fall into the category of "civil" penalties, but the most severe penalties filers face are directed toward those who commit criminal tax evasion or tax fraud. Individuals who get caught committing tax fraud face the above noted 75% civil penalty, and also substantial fines and jail time.

For example, attempting to evade or defeat tax payment is a felony carrying a fine of up to $250,000 and imprisonment for up to 5 years. (See 26 U.S.C. section 7201.) Making false statements on a tax return is also a felony risking the same fine and imprisonment for up to 3 years. (See 26 U.S.C. section 7206.) If you are being investigated for a tax crime by the IRS, it is very important to retain an attorney who is familiar with both tax and criminal matters.

Interest on Tax Debt

Although not a "penalty" in the traditional sense, a late filer or taxpayer who does not pay the entirety of the amount they owe will have to pay interest. Interest is charged on the amount of unpaid balance, penalties, and interest that has been charged to the tax account from the due date of the return until the date payment is made. The interest rate is determined every three months and is the federal short-term rate plus 3 percent. Furthermore, interest is compounded daily.

With this in mind, it should be noted that in many cases, the funds necessary to pay taxes can be borrowed at a lower effective rate than the combined IRS interest plus penalty rate.

Learn More About Tax Penalties by Talking to an Attorney

Taxes are the source of an incredible amount of stress, especially if you're facing tax penalties and are having trouble dealing with the complex tax code. Fortunately, you can contact an experienced tax attorney to discuss how to best manage your tax issues. A tax attorney can negotiate a payment plan to help you avoid collections.