Abatement of Penalties

The Internal Revenue Code contains a bewildering forest of overlapping penalties designed to “encourage” taxpayers to file on time, to pay on time, and to comply in all other ways with their federal tax obligations. Some of these penalties are discussed below. We can help avoid the assertion of these penalties, or contest them if they have already been asserted.

Failure-to-file penalty

If you don’t file by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is 5% of the tax not paid by the due date for each month or part of a month that the return is late. The maximum penalty is 25% of your tax, but it is reduced by the failure-to-pay penalty (discussed next) for any month in which both penalties apply. You will not have to pay the penalty if you can show “reasonable cause” for not filing on time. If your failure to file is due to fraud, the penalty is increased to 15% for each month or part of a month that your return is late, to a maximum of 75%.

failure-to-pay penalty

You may have to pay a penalty of 1/2 of 1% of your unpaid taxes for each month or part of a month after the due date that the tax is not paid. This penalty cannot be more than 25% of your unpaid tax. You will not have to pay the penalty if you can show good reason for not paying the tax on time. The failure to file a penalty and the failure to pay a penalty can be combined to a staggering maximum of 50% of the tax, and interest accrues not only on the tax itself but on the penalties as well. If a notice of intent to levy is issued, the rate increases to 1% at the start of the first month beginning at least 10 days after the day that the levy notice is issued. If a notice and demand for immediate payment are issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand are issued.

Penalty for frivolous return

You may be subject to a penalty of $500 if you file a return that does not include enough information to figure the correct tax or that shows an incorrect tax amount resulting from:

  • A frivolous position on your part, or
  • A desire to delay or interfere with the administration of federal income tax laws.

This penalty is in addition to any other penalty provided by law.

Accuracy-related penalty

An accuracy-related penalty of 20% applies to any underpayment due to:

  • Negligence or disregard of rules or regulations, or
  • Substantial understatement of income tax.

Negligence or disregard. The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. You will not have to pay a negligence penalty if you have a reasonable basis for a position you took. The term “disregard” includes any careless, reckless, or intentional disregard. The penalty is based on the part of the underpayment due to negligence or disregard of rules or regulations, not on the entire underpayment on the return.

Substantial authority. Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. Consideration will be given to court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin.

Adequate disclosure. The understatement may also be reduced if you have adequately disclosed the relevant facts about your tax treatment of an item. To make this disclosure, use Form 8275, Disclosure Statement. You must also have a reasonable basis for treating the item the way you did. In cases of substantial understatement only, items that meet the requirements of Revenue Procedure 96-58 (or a later update) are considered adequately disclosed on your return without filing Form 8275. Use Form 8275-R, Regulation Disclosure Statement, to disclose items or positions contrary to regulations.

Substantial understatement of income tax

For an individual, there is a “substantial understatement” if the understatement of tax exceeds the greater of:

  • 10% of the correct tax, or
  • $5,000.

Information reporting penalties

Any person who does not file an information return or a complete and correct information return with the IRS by the due date is subject to a penalty for each failure. Penalties apply to information returns as follows:

  • Correct information returns filed within 30 days after the due date, $15 each.
  • Correct information returns filed after the 30 days but by August 1, $30 each.
  • Information returns not filed by August 1, $50 each.

Maximum limits apply to all these penalties.

Failure to furnish correct payee statements. Any person who does not provide a taxpayer with a complete and correct copy of an information return (payee statement) by the due date is subject to a penalty of $50 for each statement. If the failure is due to intentional disregard of the requirement, the penalty is the greater of:

  • $100 per statement, or
  • 10% or 5% (depending on the type of statement) of the amount to be shown on the statement.

Identification numbers and other information

Any person who does not comply with other specified reporting requirements, including the use of correct identification numbers (employer identification numbers and social security numbers), is subject to a penalty of $50 for each failure.

These penalties pile one on top of another. And then the IRS charges interest on the penalties! IF you need help avoiding or contesting penalties, contact our experienced tax attorneys.


“Enhanced Opportunities to Appeal Collection Action”

IRS Notices — Penalty and Interest Charges

IRS Notice 746 — Information About Your Notice, Penalty, and Interest

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