IRS penalties
Encyclopedia
Taxpayers in the United States may face various penalties for failures related to Federal, state, and local tax matters. The Internal Revenue Service
(IRS) is primarily responsible for initiating these penalties at the Federal level. The IRS can impose only those penalties specified in Federal tax law. State and local rules vary widely, are administered by state and local authorities, and are not discussed herein.
Penalties may be monetary, may involve forfeiture of property, or may even include jail time. Most monetary penalties are based on the amount of tax not properly paid. Penalties may increase with the period of nonpayment. Some penalties are fixed dollar amounts or fixed percentages of some measure required to be reported. Some penalties may be waived or abated where the taxpayer shows reasonable cause for the failure.
Penalties apply for failures to file income tax or information returns or filing incorrect returns. Some penalties may be very minor. Penalties apply for certain types of errors on tax returns, and may be substantial. Some penalties are imposed as excise taxes on particular transactions. Certain other penalties apply for other types of failures. Willful failures generally carry much higher penalty, which may include jail. In addition, certain criminal acts may result in forfeiture of property of the taxpayer.
Where a taxpayer has filed an income or excise tax return that shows a balance due but does not pay that balance by the due date of the return (without extensions), a different charge applies. This charge has two components, first an interest charge, computed as described above, and second a penalty of 0.5% per month applied to the unpaid balance of tax and interest. The 0.5% penalty is capped at 25% of the total unpaid tax.
The under estimate penalty and interest on late payment are automatically assessed. No reasonable cause exception applies for these penalties.
adjustments, or negligence or disregard of rules or regulations. Special rules apply for each of these types of errors under which the penalty may be waived.
Late filing of partnership returns can result in penalties of $195 per month per partner. Similar penalties may apply to S corporation returns.
s must file Form 5471 with respect to each such controlled foreign corporation. Penalties for failure to timely file are $10,000 to $50,000 per form, plus possible loss of foreign tax credits. U.S. corporations more than 25% owned, directly or indirectly, by foreign persons must file Form 5472 to report such ownership and all transactions with related parties. Failure to timely file carries a $10,000 penalty per required form. This penalty may be increased by $10,000 per month per form for continued failure to file. In addition, taxpayers who fail to report changes in foreign taxes used as credits against Federal income tax may be subject to penalties.
U.S. citizen or resident taxpayers (including entities) who are beneficiaries of a foreign trust or make transfers of property to a foreign trust must report information about the transfer and the trust or corporation. Failure to timely report on Form 3520 or Form 3520-A may result in penalties of up to 35%. Similar transferors to foreign corporations failing to file Form 926 may face penalties of 10% of the value of the transfer, up to $100,000. Penalties up to $500,000 plus jail time may apply for failure to file Treasury Department Form TD F 90-22.1 each year by owners of or signatories to foreign bank or securities accounts.
In addition, certain penalties are imposed in the form of an excise tax. Pension and benefit plans must pay a tax for a variety of failures. Charities and Private foundations must pay an excise tax on prohibited transactions and other failures.
Penalties may be assessed against tax protesters who raise arguments that income tax laws are not valid or for filing frivolous returns or court petitions.
, or in the Court of Claims.
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) is primarily responsible for initiating these penalties at the Federal level. The IRS can impose only those penalties specified in Federal tax law. State and local rules vary widely, are administered by state and local authorities, and are not discussed herein.
Penalties may be monetary, may involve forfeiture of property, or may even include jail time. Most monetary penalties are based on the amount of tax not properly paid. Penalties may increase with the period of nonpayment. Some penalties are fixed dollar amounts or fixed percentages of some measure required to be reported. Some penalties may be waived or abated where the taxpayer shows reasonable cause for the failure.
Penalties apply for failures to file income tax or information returns or filing incorrect returns. Some penalties may be very minor. Penalties apply for certain types of errors on tax returns, and may be substantial. Some penalties are imposed as excise taxes on particular transactions. Certain other penalties apply for other types of failures. Willful failures generally carry much higher penalty, which may include jail. In addition, certain criminal acts may result in forfeiture of property of the taxpayer.
Under estimate and late payment penalties
Taxpayers are required to have withholding of tax or make quarterly estimated tax payments before the end of the tax year. Since accurate estimation requires accurate prediction of the future, taxpayers may underestimate the amount due. The penalty for paying too little estimated tax or having too little tax withheld is computed like interest on the amount that should have been but was not paid. For 2009, this interest rate was 4%.Where a taxpayer has filed an income or excise tax return that shows a balance due but does not pay that balance by the due date of the return (without extensions), a different charge applies. This charge has two components, first an interest charge, computed as described above, and second a penalty of 0.5% per month applied to the unpaid balance of tax and interest. The 0.5% penalty is capped at 25% of the total unpaid tax.
The under estimate penalty and interest on late payment are automatically assessed. No reasonable cause exception applies for these penalties.
Late income tax return penalties
If a taxpayer is required to file an income or excise tax return and fails to timely do so, an alternate penalty may be assessed. The penalty is 5% of the amount of unpaid tax per month the return is late, up to a maximum of 25%. The 25% cap above applies to the 5% late filing penalty and the 0.5% late payment penalty together. The late filing penalty may be waived or abated on showing of reasonable cause for failure. A minimum penalty of $135 may apply for late filing of an income tax return.Accuracy related penalties
If amounts reported on an income tax return are later adjusted by the IRS and a tax increase results, an additional penalty may apply. This penalty of 20% or 40% of the increase in tax is due in the case of substantial understatement of tax, substantial valuation misstatements, transfer pricingTransfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...
adjustments, or negligence or disregard of rules or regulations. Special rules apply for each of these types of errors under which the penalty may be waived.
Late information return penalties
Certain types of returns do not require payment of tax. These include forms filed by employers to report wages (Form W-2) and businesses to report certain payments (Form 1099 series instructions). The penalty for failures related to these forms is a small dollar amount per form not timely filed, and the amount of penalty increases with the degree of lateness. The current maximum penalty for these forms is $50. Many of the forms must be filed electronically, and filing on paper is considered non-filing.Late filing of partnership returns can result in penalties of $195 per month per partner. Similar penalties may apply to S corporation returns.
100% penalty on unpaid withholding taxes
Employers are required to withhold income and social security taxes from wages paid to employees, and pay these amounts promptly to the government. A penalty of 100% of the amount not paid over (plus liability for paying the withheld amounts) may be collected without judicial proceedings from each and every person who had custody and control of the funds and did not make the payment to the government. This applies to company employees and officers as individuals, as well as to companies themselves. There have been reported cases of the IRS seizing houses of those failing to pay over employee taxes.Penalties for failure to provide foreign information
Taxpayers who are shareholders of controlled foreign corporationControlled Foreign Corporation
Controlled foreign corporation rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of entities that is not currently taxed to the owners of the entity. The basic mechanism and...
s must file Form 5471 with respect to each such controlled foreign corporation. Penalties for failure to timely file are $10,000 to $50,000 per form, plus possible loss of foreign tax credits. U.S. corporations more than 25% owned, directly or indirectly, by foreign persons must file Form 5472 to report such ownership and all transactions with related parties. Failure to timely file carries a $10,000 penalty per required form. This penalty may be increased by $10,000 per month per form for continued failure to file. In addition, taxpayers who fail to report changes in foreign taxes used as credits against Federal income tax may be subject to penalties.
U.S. citizen or resident taxpayers (including entities) who are beneficiaries of a foreign trust or make transfers of property to a foreign trust must report information about the transfer and the trust or corporation. Failure to timely report on Form 3520 or Form 3520-A may result in penalties of up to 35%. Similar transferors to foreign corporations failing to file Form 926 may face penalties of 10% of the value of the transfer, up to $100,000. Penalties up to $500,000 plus jail time may apply for failure to file Treasury Department Form TD F 90-22.1 each year by owners of or signatories to foreign bank or securities accounts.
Excise taxes as penalties
Federal excise taxes are imposed on a variety of goods and services. Some of these taxes require purchase of tax stamps or other evidence of advance payment of tax. Some require collection of the tax by retailers. An assortment of penalties apply to manufacturers and retailers not complying with the particular rules.In addition, certain penalties are imposed in the form of an excise tax. Pension and benefit plans must pay a tax for a variety of failures. Charities and Private foundations must pay an excise tax on prohibited transactions and other failures.
Tax fraud penalties
Intentional filing of materially false tax returns is considered tax fraud, and is a criminal offence. Any person convicted of committing tax fraud, or aiding and abetting another in committing tax fraud, may be subject to forfeiture of property and/or jail time. Conviction and sentencing is through the court system. Responsibility for prosecution falls to the U.S. Department of Justice not the Internal Revenue Service.Penalties may be assessed against tax protesters who raise arguments that income tax laws are not valid or for filing frivolous returns or court petitions.
Tax adviser penalties
Penalties also apply to persons who promote tax shelters or who fail to maintain and disclose lists of reportable transactions their customers or clients for those transactions. These monetary penalties can be severe.Judicial appeal of penalties
Most penalties are subject to judicial review. However, the courts rarely modify assessment of the penalties and interest for under estimate or late payment. No criminal penalties may be imposed by the IRS or Department of Justice except by order of a court upon conviction at trial. Convictions may be appealed within the court system. Prosecution for tax crimes is undertaken in the U.S. District Court having jurisdiction over the taxpayer. Appeal of other tax penalties may be in that district court, in the United States Tax CourtUnited States Tax Court
The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
, or in the Court of Claims.
Further reading
- Meldman, Robert E., Federal Taxation Practice and Procedure, ISBN 978-0808016472, Chapters 9 and 18
- Shafiroff, Ira L., Internal Revenue Service Practice and Procedure Deskbook, Kindle edition (no ISBN), or hardcover ISBN 978-0872241091
- Pratt, Kulsrud, et al, Federal Taxation, 2006 Edition ISBN 978-0-759-35175-2, pages 2-6 through 2-15.
- Willis, Hoffman, et al, South-Western Federal Taxation, 2009 Edition ISBN 978-0-324-66052-4, pages 26-13 through 26-19.