The Internal Revenue Service (IRS) imposes penalties on taxpayers who are not compliant with their tax or information filings. Penalties can be imposed for several reasons, including failure to file on time, failure to pay taxes you owe when due, and failure to provide accurate information on your return. As a taxpayer and business owner, you should understand the different penalties that can be assessed by the IRS and what your options are if you’ve received one.
What Penalties Are Assessed by the IRS?
The IRS can assess several penalties on taxpayers who do not meet their tax obligations. Interest will continue to accrue on a penalty if you fail to pay that penalty in full. If you have been charged a penalty, the IRS will send you a letter in the mail stating the penalty, the reason the penalty was charged, and what the next steps are to pay or challenge that penalty.
IRS penalties that can be assessed include:
- Accuracy-related penalty — The accuracy penalty is one of the most common civil penalties imposed by the IRS. The accuracy penalty is usually charged when a taxpayer is audited and can be assessed for a wide variety of reasons, ranging from a major understatement of income tax to negligence, intentional disregard of the IRS’s regulations, a substantial overstatement of pension liabilities, or a substantial understatement of estate tax valuation. Typically, the penalty charged is twenty percent (20%) of the part of the underpayment of tax that occurred.
- Criminal tax penalties — A taxpayer can face criminal penalties if convicted of fraud, tax evasion, failure to file a return or reveal offshore accounts, or willfully failing to pay estimated taxes.
- Audit penalties — If you’ve received an audit, the Internal Revenue Service does not automatically assess a penalty. The IRS may charge a penalty depending on the outcome and may assess more taxes owed.
- Underpayment penalty — If you fail to pay the required amount of tax throughout the year, the IRS will charge an underpayment penalty.
- Tax preparer penalties — A wide range of penalties can be imposed on a tax preparer. The penalties can range from small to substantial and are calculated based on the number of violations, the regulations violated, the rates of inflation, and the tax years involved.
A penalty can be avoided by filing a timely, correct return. If you cannot meet the filing deadline, you can file for an extension of time to file or apply for a payment plan. While an extension may extend your time to file, an extension does not extend your time to pay the tax due. You must verify that the information in the notice you received from the IRS is correct. If it is not, and the issue can be resolved, the penalty may be inapplicable.
Can You Get an IRS Penalty Removed?
The IRS may remove or reduce a penalty if you can establish that you acted in good faith and show reasonable cause for failure to satisfy your tax obligations. Interest can never be removed. Interest on the penalty may be removed or reduced if the penalty itself is removed or reduced. Reasonable cause is evaluated individually by the IRS, based on the facts of your situation.
You might also qualify for penalty relief if there was a valid reason or circumstances beyond your control as to why you didn’t pay your taxes on time. Acceptable reasons can include being affected by a natural disaster, serious illness, death of a family member, system issues that delayed timely payment, or the inability to obtain records. You will need to provide the IRS with enough information to support your position. Lack of knowledge, reliance on a tax preparer, lack of funds, and mistakes do not qualify as valid reasons for failure to make a timely payment.
You might have the right to dispute the penalty if you disagree with the amount that you owe. If the IRS rejects your request to remove a penalty, you might be eligible to request an appeals hearing within thirty (30) days of the rejection letter.
Contact an Experienced New York Tax Attorney
Understanding your tax obligations can be complicated and it’s critical to have skillful counsel who can advise you regarding these matters. Offering experienced representation, the attorneys at Brinen & Associates assist clients with a wide range of tax matters at both the state and federal levels, including issues involving penalties. Call (212) 330-8151 or send us a message to learn more about how we can help you resolve your tax dispute.