IRS penalties

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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 charging these penalties at the Federal level. The IRS can assert only those penalties specified imposed under Federal tax law. State and local rules vary widely, are administered by state and local authorities, and are not discussed herein.

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Penalties may be monetary or may involve forfeiture of property. Criminal penalties may include jail time, but are imposed only by a federal judge after a defendant is convicted. 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. [1] Excise taxes used as penalties are imposed in the Code sections relating to particular kinds of transactions. Some penalties may be waived or abated where the taxpayer shows reasonable cause for the failure.

Penalties apply for failures to file income tax returns or information returns, or for 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. Certain acts may result in forfeiture of property of the taxpayer.

There are over 150 kinds [2] of civil penalties in the U.S. Internal Revenue Code, ranging in severity which is reflected in the amount of the applicable fines.

Underestimate 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. Because accurate estimation requires accurate prediction of the future, taxpayers sometimes underestimate the amount due. The penalty for paying too little estimated tax or having too little tax withheld is computed with interest on the amount that should have been, but was not, paid. [3]

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: 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. [4] The 0.5% penalty is capped at 25% of the total unpaid tax.

The underestimate penalty and interest on late payment are automatically assessed. [5]

Penalties for failure to timely file returns or timely pay tax

Penalty for Failure to Timely File Return: If a taxpayer is required to file an income or excise tax return and fails to timely do so, a late filing penalty may be assessed. The penalty is 5% of the amount of unpaid tax per month (or partial month) the return is late, up to a maximum of 25%. [6] A minimum penalty of $435 may apply for returns over 60 days late. The minimum penalty is the lesser of $435 or 100% of the tax due on the return.

Penalty for Failure to Timely Pay Tax: If a taxpayer fails to pay the balance due shown on the tax return by the due date (even if the reason of nonpayment is a bounced check), there is a penalty of 0.5% of the amount of unpaid tax per month (or partial month), up to a maximum of 25%.

Penalty for Failure to Timely Pay After Issuance of Notice: If a taxpayer fails to pay any additional tax assessed by the IRS (usually as a result of an audit which can be avoided [7] ) the taxpayer may be liable for a penalty equal to 0.5% for each month (or partial month) during which the failure continues, if the amount is not paid within 21 calendar days after the date of an IRS notice demanding the payment.

If both the failure to file and the failure to pay penalties apply during the same month, then the failure to file penalty is reduced by 0.5% each month.

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. The failure to file penalty is imposed and starts to accrue interest from the due date of the return. [8] The failure to pay penalty is imposed when a taxpayer pays the taxes after payment was due, computed from the date prescribed for paying the tax. [9]

The Internal Revenue Service advises that if the taxpayer wants to compute the penalty for failure to timely file and the penalty for failure to timely pay the tax shown on the return, or the interest, and to pay those items at the time the return is filed, the taxpayer can "identify and enter the amount in the bottom margin" on the second page of Form 1040. The IRS advises that the taxpayer "not include interest or penalties (other than the estimated tax penalty)" in the "Amount Owed" line of the form. [10]

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 pricing adjustments, or negligence or disregard of rules or regulations. For example, a valuation overstatement can result in a 30% penalty on the amount of tax owed. Special rules apply for each of these types of errors under which the penalty may be waived. [11]

Penalties in connection with information returns

Certain types of returns, called "information 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 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. [12] Many of the forms must be filed electronically, and filing on paper is considered non-filing. [13]

Late filing of returns of partnership income (Form 1065) can result in penalties of $195 per month per partner, up to a maximum of 12 months. [14] Similar penalties may apply to an income tax return (Form 1120S) for an S corporation. [15] [16]

100% penalty on unpaid withholding taxes

Employers are required to withhold income and social security taxes from wages paid to employees, and to pay these amounts promptly to the government. [17] 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. [18] This applies to company employees and officers as individuals, as well as to companies themselves. [19] There have been reported cases of the IRS seizing houses of those failing to pay over employee taxes. [20]

Penalties for failure to provide foreign information

Taxpayers who are shareholders of controlled foreign corporations must file Form 5471 with respect to each such controlled foreign corporation. [21] 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. [22] 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. [23]

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%. [24] 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. [25]

Excise taxes as penalties

Federal excise taxes are imposed on a variety of goods and services. [26] 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. [27]

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. [28] Charities and private foundations must pay an excise tax on prohibited transactions and other failures. [29]

Tax fraud penalties

Intentional filing of materially false tax returns is a criminal offence. A person convicted of committing tax fraud, or aiding and abetting another in committing tax fraud, may be subject to forfeiture of property [30] and/or jail time. [31] 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 who otherwise file frivolous returns or court petitions. [32]

Tax adviser penalties

Penalties also apply to people who promote tax shelters [33] or who fail to maintain and disclose lists of reportable transactions their customers or clients for those transactions. [34] These monetary penalties can be severe.

Judicial appeal of penalties

Most penalties are subject to judicial review. [35] However, the courts rarely modify assessment of the penalties and interest for underestimate or late payment.

Further reading

Related Research Articles

Form 1040 IRS tax record

Form 1040 is an IRS tax form used for personal federal income tax returns filed by United States residents. The form calculates the total taxable income of the taxpayer and determines how much is to be paid or refunded by the government.

Taxation in the United States

The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2020, taxes collected by federal, state, and local governments amounted to 25.5% of GDP, below the OECD average of 33.5% of GDP. The United States had the seventh-lowest tax revenue-to-GDP ratio among OECD countries in 2020, with a higher ratio than Mexico, Colombia, Chile, Ireland, Costa Rica, and Turkey.

Tax noncompliance is a range of activities that are unfavorable to a government's tax system. This may include tax avoidance, which is tax reduction by legal means, and tax evasion which is the criminal non-payment of tax liabilities. The use of the term "noncompliance" is used differently by different authors. Its most general use describes non-compliant behaviors with respect to different institutional rules resulting in what Edgar L. Feige calls unobserved economies. Non-compliance with fiscal rules of taxation gives rise to unreported income and a tax gap that Feige estimates to be in the neighborhood of $500 billion annually for the United States.

Payroll tax Tax imposed on employers or employees

Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their employees. By law, some payroll taxes are the responsibility of the employee and others fall on the employer, but almost all economists agree that the true economic incidence of a payroll tax is unaffected by this distinction, and falls largely or entirely on workers in the form of lower wages. Because payroll taxes fall exclusively on wages and not on returns to financial or physical investments, payroll taxes may contribute to underinvestment in human capital such as higher education.

Tax returns in the United States are reports filed with the Internal Revenue Service (IRS) or with the state or local tax collection agency containing information used to calculate income tax or other taxes. Tax returns are generally prepared using forms prescribed by the IRS or other applicable taxing authority.

A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels. The taxes may also be referred to as income tax or capital tax. A country's corporate tax may apply to:

Three key types of withholding tax are imposed at various levels in the United States:

A tax refund or tax rebate is a payment to the taxpayer when the taxpayer pays more tax than they owe.

Form 1099 is one of several IRS tax forms used in the United States to prepare and file an information return to report various types of income other than wages, salaries, and tips. The term information return is used in contrast to the term tax return although the latter term is sometimes used colloquially to describe both kinds of returns.

Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, or a Prélèvement à la source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. In most jurisdictions, tax withholding applies to employment income. Many jurisdictions also require withholding taxes on payments of interest or dividends. In most jurisdictions, there are additional tax withholding obligations if the recipient of the income is resident in a different jurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent or even the sale of real estate. Governments use tax withholding as a means to combat tax evasion, and sometimes impose additional tax withholding requirements if the recipient has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be common.

Income taxes in the United States are imposed by the federal government, and most states. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

Tax protesters in the United States have advanced a number of arguments asserting that the assessment and collection of the federal income tax violates statutes enacted by the United States Congress and signed into law by the President. Such arguments generally claim that certain statutes fail to create a duty to pay taxes, that such statutes do not impose the income tax on wages or other types of income claimed by the tax protesters, or that provisions within a given statute exempt the tax protesters from a duty to pay.

Internal Revenue Service (IRS) tax forms are forms used for taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service of the United States. They are used to report income, calculate taxes to be paid to the federal government, and disclose other information as required by the Internal Revenue Code (IRC). There are over 800 various forms and schedules. Other tax forms in the United States are filed with state and local governments.

Corporate tax in the United States

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% due to the passage of the Tax Cuts and Jobs Act of 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. The corporate Alternative Minimum Tax was also eliminated by the 2017 reform, but some states have alternative taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Groups of corporations controlled by the same owners may file a consolidated return.

Tommy Keith Cryer, also known as Tom Cryer, was an attorney in Shreveport, Louisiana who was charged with and later acquitted of willful failure to file U.S. Federal income tax returns in a timely fashion. In a case in United States Tax Court, Cryer contested a determination by the U.S. Internal Revenue Service that he owed $1.7 million in taxes and penalties. Before the case could come to trial, Cryer died June 4, 2012. He was 62.

Foreign Investment in Real Property Tax Act

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), enacted as Subtitle C of Title XI of the Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, 94 Stat. 2599, 2682, is a United States tax law that imposes income tax on foreign persons disposing of US real property interests. Tax is imposed at regular tax rates for the taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 15% to an amount that will cover the tax liability, upon application in advance of sale to the Internal Revenue Service. FIRPTA overrides most nonrecognition provisions as well as those remaining tax treaties that provide exemption from tax for such gains.

A tax protester is someone who refuses to pay a tax claiming that the tax laws are unconstitutional or otherwise invalid. Tax protesters are different from tax resisters, who refuse to pay taxes as a protest against a government or its policies, or a moral opposition to taxation in general, not out of a belief that the tax law itself is invalid. The United States has a large and organized culture of people who espouse such theories. Tax protesters also exist in other countries.

Tax protester arguments are arguments made by people, primarily in the United States, who contend that tax laws are unconstitutional or otherwise invalid.

The United States taxes citizens and residents on their worldwide income. Citizens and residents living and working outside the U.S. may be entitled to a foreign earned income exclusion that reduces taxable income. For 2021, the maximum exclusion is $108,700 per taxpayer. Taxpayers filing a joint return are entitled to up to two exclusions if both have earned income. In addition, the taxpayer may exclude housing expenses in excess of 16% of this maximum but with limits.

In 2014, the Internal Revenue Service (IRS) introduced a host of tax provisions to accommodate the Affordable Care Act.

References

  1. ↑ Most of the penalty rules are in Chapters 68 through 75 of the Internal Revenue Code, sections 6651 through 7344. 26 USC Subtitle F.
  2. ↑ Alan J. Tarr, J.D., LL.M. (Taxation) & Pamela Jensen Drucker, J.D., LL.M. (Taxation), Civil Tax Penalties, U.S. Income Portfolios, Vol. 634 (2d ed. 2012), Bloomberg BNA.
  3. ↑ 26 USC 6654.
  4. ↑ 26 USC 6651(a)(3).
  5. ↑ See IRS Tax Topic 653.
  6. ↑ 26 USC 6651(a)(1).
  7. ↑ "How to Avoid an IRS Audit? -". taxsaversonline.com. 2021-11-19. Retrieved 2021-12-20.
  8. ↑ IRC§6651(a)(1)
  9. ↑ IRC§6651(a)(2)
  10. ↑ "1040 (2015)". Internal Revenue Service. Retrieved June 28, 2016.
  11. ↑ 26 USC 6662.
  12. ↑ 26 USC 6721.
  13. ↑ 26 CFR 301-6721-1(a)(2)(ii).
  14. ↑ 26 USC 6698.
  15. ↑ 26 USC 6699.
  16. ↑ Technically, the Form 1120S is an income tax return, not an information return.
  17. ↑ 26 USC 3101-3406.
  18. ↑ 26 USC 6672.
  19. ↑ 26 USC 3504.
  20. ↑ See, e.g., United States v. St. Clair, 45 Amer. Fed. Tax Rep. 2d 80-1528, 80-1 U.S. Tax Cas. (CCH) ¶ 9364, (N.D. Texas 1980), in which the court upheld seizure of the taxpayer's personal residence for failure to pay over withholding taxes payable by the company.
  21. ↑ 26 USC 6038.
  22. ↑ 26 USC 6038A.
  23. ↑ 26 USC 6689.
  24. ↑ 26 USC 6677.
  25. ↑ 26 USC 6038B.
  26. ↑ Subtitle D of 26 USC.
  27. ↑ Manufacturers Taxes, IRS
  28. ↑ 26 USC 4971-4980G
  29. ↑ 26 USC 4911, 4912 and 26 USC 4940-4948.
  30. ↑ 26 USC 7301-7328.
  31. ↑ 26 USC 7201-7217.
  32. ↑ 26 USC 6702 26 USC 6673.
  33. ↑ 26 USC 6700.
  34. ↑ 26 USC 6707A.
  35. ↑ See the discussions in IRS Publication 5 .
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