• Filing and Paying Late – These penalties will apply when a taxpayer fails to timely file and does not pay the taxes he or she owes. The penalty is 5% of the unpaid tax for each month or part of a month the return is late, but not for more than five months.
If a taxpayer does not file a return within 60 days of the due date, the minimum penalty is $135 or 100% of the balance of the tax due on the return, whichever is smaller.
• Underpayment of Estimated Tax – Our tax system is a “pay-as-you-go” system. When a taxpayer fails to prepay the required amount, he or she can be subject to the underpayment penalty. This penalty is 2% higher than the prime rate and the penalty is computed on a quarter-by-quarter basis.
• Dishonored Check – A penalty is charged if a taxpayer’s check is returned because of insufficient funds. For checks of $1,250 or more, the penalty is 2% of the check amount. For checks less than $1,250, the penalty is the lesser of $25 or the amount of the check.
• Paying Late – The penalty is ½% of the unpaid tax for each month or part of a month the tax is unpaid. If the IRS issues a Notice of Intent to Levy and the taxpayer does not pay the balance within 10 days, the penalty increases to 1% per month. The penalty cannot be more than 25% of the tax paid late. The late payment penalty is reduced to ¼% per month for those paying in installments.
• Missing ID Number – This penalty is $50 for each missing number. This penalty is charged when a taxpayer does not provide a social security number (SSN) for himself, a dependent, or another person or does not provide his/her SSN to another person when required.
• Penalty on Tips – This penalty is charged if a taxpayer does not report tips to his/her employer. It equals 50% of the social security tax on the unreported tips.
• Negligence – This “accuracy-related” penalty is 20% of the tax underpayment that is due to negligence or tax valuation misstatements.
• Fraud – The civil fraud penalty is one of the most powerful tools that the IRS has. It applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the taxpayer’s underpayment attributable to fraud. Although civil fraud is not defined by statute, some courts have defined it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed.
• “Excessive” Claim Penalty – Generally, if a claim for a refund or credit for income tax is made for an “excessive amount,” the person making the claim is liable for a penalty equal to 20% of the excessive amount. The “excessive amount” is the amount by which the amount of a person’s claim for a refund or credit for any tax year exceeds the amount of the claim allowable under the Internal Revenue Code for that tax year.
• Frivolous Return – In addition to any other penalties, the law imposes a penalty of $5,000 for filing a frivolous return. A frivolous return is one that does not contain information needed to figure the correct tax or shows a substantially incorrect tax because the taxpayer takes a frivolous position or desires to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the space where the taxpayer signs.
It is possible that some of the penalties listed above can be reduced or removed if a taxpayer can show reasonable cause. The IRS Penalty Handbook used by its agents defines reasonable cause as those reasons deemed administratively acceptable to the IRS.