There are many different types of penalties that the IRS can impose on individual and business taxpayers. Here are some of the more common IRS penalties.
- 1 Failure to File and Failure to Pay Penalty
- 2 Estimated Tax Penalties
- 3 Failure to Deposit Penalty
- 4 Return Related Penalties
- 5 Information Return Penalties
- 6 Penalty Abatement
Failure to File and Failure to Pay Penalty
Legal authority for the IRS to assess penalties for failure to file and/or pay are provided by:
- IRC 6651 – provides for additions to tax for failure to file returns required to be filed to report tax, and for failure to pay tax required to be reported on those returns
- IRC 6698 provides for a penalty for failure to file a complete partnership return as required under IRC 6031.
- IRC 6699 provides for a penalty for failure to file a S-corporation return as required by IRC 6037.
- The penalty for failure to make required payments under IRC 7519(f)(4)(A),
Postmarked Date Rule
Under IRC 7502, any return or payment received after its due date is treated as filed or paid on the postmark date. IRC 7502 also applies to electronic postmarks for e-filed returns. When the due date for filing or paying falls on a weekend or legal holiday, the return or payment is considered to have been filed or made on the dude date if it is mailed in the next succeeding date that is not a weekend or legal holiday.
When the IRS Service Center receives a return, the tax technician should date stamp the return and check the postmark date of the return before applying the stamp. If the postmark date is after the return filing date, then the envelope will be retained as evidence of late filing. If the postmark date is before the filing date, then the tax return due date will be stamped on the return.
I have personally seen mistakes occur. For example, a client had submitted a claim for refund that was postmarked a day or two prior to the date of the refund statute of limitations. The IRS received it a few days after this date and accidentally used the receipt date instead of the postmark date and denied the claim for refund. This is another reason to always send any documents to the IRS via certified mail return receipt, or through a carrier that offers tracking.
Also, the tax return must be signed! If the IRS receives an unsigned return, they will not use the postmark date of that return and will not consider it as filed. I’ve seen a case where the client (prior to coming to us) mailed his return on time but forgot to sign the tax return and wasn’t notified by the IRS until months later. Meanwhile, his account accrued significant failure to file penalties. “IRC 6061 through IRC 6065 require that any return made under the provisions of the internal revenue laws must be signed by the taxpayer (or other such authorized individual) under penalties of perjury. A return that is not signed by the taxpayer (or an authorized individual) fails to meet the requirement to file that return, and may subject the taxpayer to penalties for failure to file.” IRM 22.214.171.124.1.1 (04-10-2011)
The IRS provides many types of extensions for individual and business taxpayers; in addition, there are specific extensions for taxpayers that are in combat zone duty, those located in a federal disaster area, and taxpayers suffering undue hardship. IRC § 7508, 7805A, 6061(a). However, an extension to file a tax return does not extend the time to pay (except if you file for an extension due to undue hardship, or taxpayers abroad who are allowed until 6/15 to pay). You should make a tax payment along with your filing extension. You should have your accountant calculate the estimated taxes that you will owe.
If you file your federal tax return late and owe tax with the return, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It will not exceed 25 percent of your unpaid taxes.
Estimated Tax Penalties
Taxpayers are required to pay income tax as income is earned, through either withholding or estimated tax payments. Taxpayers who do not have sufficient amounts withheld are fail to make estimated tax payments may be assessed a penalty for underpayment of estimated tax. IRC 6654 (individuals) IRC 6655 (corporate).
The penalty is computed by applying the underpayment rate established under IRC 6621 to the amount of the underpayment for the period of the underpayment. In effect, the penalty is the sum of the penalties for each day during which an underpayment exists. The penalty for each day is computed by multiplying the daily rate by the underpayment amount. The daily rate is the rate determined under IRC 6621 divided by the number of days in the calendar year.
Taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
Failure to Deposit Penalty
This is also known as a payroll tax penalty. Employers have an obligation to submit payroll taxes on time and the IRS is very stringent about this requirement. Payments must be both made on time and in full. Failure to do so can be severe, especially if the IRS finds the employer intentionally failed to make the deposits.
Deposit Due date
The deposit due date will depend on the tax form involved and the amount of tax. Taxpayers must make their deposit anytime between the date the payroll liability is incurred and the date the deposit is due. Deposits are due only on business days. A business day is every calendar day that is not a Saturday, Sunday, or legal holiday under IRC 7503.
The amount of the penalty depends on how late the payment is and the amount that is past due. For liability amounts not properly or timely deposited, the penalty rates are as follows:
- 2 percent for deposits 1—5 days late,
- 5 percent for deposits 6—15 days late,
- 10 percent for deposits made more than 15 days late. This also applies to amounts paid within 10 days of the date of the first notice requesting payment for the tax due.
- 10 percent for required deposits not paid by EFT.
- 15 percent ( a 5 percent addition to the 10 percent for late payment in (c) above) for all amounts still unpaid more than 10 days after the date of the first notice requesting payment of the tax due or the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier
Return Related Penalties
There are several types of penalties that can be assessed for filing inaccurate returns:
- IRC 6662, Imposition of Accuracy-Related Penalty on Underpayments,
- IRC 6663, Imposition of Fraud Penalty,
- IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions,
- IRC 6707A, Penalty for Failure to include Reportable Transaction Information with Return, and
- IRC 6676, Erroneous Claim for Refund or Credit penalty.
The above IRC sections provide legal authority to the IRS to assess these types of penalties. Unlike some of the prior penalties discussed, return related penalties are not automatically assessed. Rather, they are assessed by an IRS examiner usually during the course of an audit.
- The amount of the IRC 6662 penalty is 20 percent of the portion of the underpayment resulting from the misconduct. The penalty rate increases to 40 percent in certain circumstances involving gross valuation misstatements, nondisclosed noneconomic substance transactions, and undisclosed foreign financial asset understatements.
- The amount of the IRC 6663 penalty is 75 percent of the underpayment due to fraud. See IRM 126.96.36.199.
- The amount of the IRC 6662A penalty is 20 percent of the reportable transaction understatement. The penalty rate increases to 30 percent of the reportable transaction understatement where the transaction was not properly disclosed. See IRM 188.8.131.52.4.
- The amount of the IRC 6676 penalty is 20 percent of the “excessive amount.” See IRM 184.108.40.206.
- Stacking of IRC 6662, IRC 6663, IRC 6662A, and IRC 6676 penalties is not permitted. The maximum amount of the IRC 6662 penalty imposed on a portion of an underpayment of tax is 20 percent (or 40 percent in certain circumstances) of that portion of the underpayment, even if that portion of the underpayment is attributable to more than one type of misconduct under IRC 6662.
Information Return Penalties
Some taxpayers are required to file information returns to the IRS such as Forms W-2, 1098, 1099, and 1042-S. If you are an employer or hired an independent contractor, and fail to file a W-2 or 1099 for your employee or contractor, you could be subject to penalties under this section.
IRC 6721 and 6722 provide authority to the IRS to assess penalties for failing to file or incorrectly filing information returns with the IRS and/or for failing to provide a correct information return to a payee.
Recently Congress passed the Trade Preferences Extension Act of 2015 which has increased the penalty from $100 to $250 for each form that is not filed or furnished, up to a maximum of $3 million. The penalty for intentionally failing to file has increased from $250 to $500. The law became effective Jan 1, 2016.
Reduced penalties are charged if failures are corrected quickly, but the Act increases the reduced penalties also. For failures that are corrected within 30 days, the reduced penalty is $50 per return (currently $30) and the maximum penalty is $500,000 per calendar year (currently $250,000). For failures corrected after 30 days but before Aug. 1, the reduced penalty is $100 per return (currently $60) and the reduced maximum penalty is $1 million per calendar year (currently $500,000).
Payors rely on payees to provide accurate information to make the filings, such as social security numbers, correct names, addresses, etc. In come cases when payees do not provide accurate information or refuse to provide the information, payors are obligated to initial back-up withholding and deposit the amount with the IRS.
Nearly all penalties can be abated. Taxpayers are usually unsuccessful in trying to abate penalties on their own because they do not understand how to qualify or apply for penalty abatement. Penalty abatement is discretionary and it helps to have a tax attorney present a well-reasoned and thought out request for penalty abatement that is supported by facts and law.
If you have been assessed substantial amounts of penalties by the IRS, contact us. The first step will be to request and review your account transcripts to determine what types of penalties have been assessed and the amount. We will then discuss which ones might qualify for penalty abatement and have the best likelihood of succeeding.
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