The Different kinds of Tax Penalties

Tax Audit Notice

What are the Different Kinds of Tax Penalties?

Every April 15th, or a couple of days after, every United States citizen is required to pay taxes to the Internal Revenue Service. (“IRS”) However, what many people do not realize is that there are several different types of consequences out there for those who miss their payment, miss their filing, or several other situations which may lead to having to pay a penalty. Most penalties of the monetary variety, but there are situations where the federal or state government may forfeit your property or possibly impose jail time. Imposition of jail time is often done by a federal judge following a conviction.

Here are the different types of Tax Penalties:

Underestimate Tax Penalty Most people have taxes withheld for them from each of their paychecks. The person’s employer will usually withhold a certain amount from each paycheck based on the employee’s responses on their I-9 Form when they begin their employment, however, there are some people who opt to make an estimated payment for what they believe their tax obligation is going to be. The downfall to this method is that if you underestimate the amount that you are going to owe then you will be charged a penalty, which is usually a percentage of the amount that you should have paid.

Penalty for Failure to Timely Pay Tax Everyone is aware that when you file your taxes there are usually two outcomes. Either you will receive a return on your taxes or you owe something to the IRS. If you fail to make payment of the amount owed by the due date then you will be subjected to a penalty. The penalty for late payment is 0.5% per month and can continue up to 25% of your unpaid taxes due.

Penalty for Failure to Timely File Return Similar to the Late Payment penalty there is also a penalty for Failing to File your Taxes on time, without applying for an extension. If you fail to File your Tax Return on Time then, similar to the Late Payment Penalty, there is a 5% penalty on the amount of unpaid taxes per month that you are late, up to a maximum of 25%. The minimum, however, is $135 or 100% of the tax due on the date of the return, whichever is smaller. If you owe both the Failure to Pay and Failure to File Penalty then the maximum allowable penalty is 5%. Furthermore, even if you are unable to Pay your Taxes you should still file your return. The reason being that the Penalty for not paying is 10 times less than the penalty for not filing. The IRS will also accept partial payment, additionally, if you pay at least 90% of your owed taxes then the IRS will not apply a penalty to the remaining balance.

Penalty for Failure to Timely Pay after Issuance of Notice If you fail to make payment on the amount owed to the IRS 10 days after they send notice of intent to levy then the penalty rate increases to 1%, but still cannot exceed 25%.

Accuracy Penalty If the IRS discovers an error on the amount owed on your tax return due to Negligence, disregard of rules or regulations, substantial understatement of income tax, then the penalty is 20% of any underpayment discovered by the IRS.

    • Negligence is any failure to make a reasonable attempt to comply with the provisions of tax laws, to exercise ordinary and reasonable carte in the preparation of your tax returns, or failure to adequately keep books. If you can show a reasonable basis for your filing then it will not be attributable to negligence.
    • Disregard for Rules must be done in a careless, reckless, or intentional manner. However, if the taxpayer takes a stand contrary to the rule then they must disclose their position in contrast to the rule.
    • Substantial understatement may be avoided if the taxpayer can show substantial authority for their position which caused the understatement or has a reasonable basis for the tax treatment of a particular item.

Tax Form Filing Penalties Companies are required to file forms with the IRS to report wages (W-2) and to report certain payments (Form 1099). If a corporation fails to file these forms in a timely manner there could be up to a $50 fine. If the company is a partnership and the partnership fails to file a Form 1065 then there could be a penalty of $195 per month per partner, up to a maximum of 12 months.

100% Penalty on unpaid withholding Taxes If a company fails to pay the amount that they withhold from an employee’s paycheck then there is a 100% penalty assessed to any individual that is responsible for collecting, accounting for, and paying over withheld federal taxes and willfully fails to pay those taxes. The penalty is 100% as the IRS may choose to assess the entire unpaid amount as a penalty.

Penalty for failure to provide foreign information Foreign companies with at least a 10 percent interest in the United States is required to file a Form 5471 with the IRS. Failure to file this form, regardless if the company does or doesn’t owe taxes, results in a $10,000 fine per form per year. Furthermore, companies must also file a Form 5472 if more than 25% of their employees are foreign. Failure to file this form results in a $10,000 fine per form, per year.

Tax fraud penalties Any person that is found to be filing or aiding and abetting another in committing tax fraud, may be subject to forfeiture of property, and/or jail time.

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Eric Gros-Dubois

Eric P. Gros-Dubois founded EPGD Business Law in 2013 and is the current head of the firm’s corporate, estate planning, and tax practice, and manages the firm’s Washington D.C. office. With a JD and MBA, and a specialization in finance, Eric is able to step back and view the legal world through a commercial lens while also acting as a trusted business advisor for his clients. He does his best to be solutions oriented, and tries to think like a business owner, not just a lawyer.


*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.

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