An IRS civil penalty is a punishment that the Internal Revenue Service (IRS) can impose on taxpayers for various reasons.
The IRS has the power to levy civil penalties for a wide range of offenses, including tax evasion, back taxes, failure to file returns, and fraud.
In this article, we will take a closer look at the list of IRS civil penalties and answer some common questions about them.
We will also provide tips on what to do if you receive an IRS civil penalty.
what is failure to file penalty IRS?
Those who do not submit a tax return by the annual due date, which is usually April 15 of the next year, are subject to this penalty. The penalty for failing to file your tax return is a fine of 5% of your taxable income for each month or portion month in which you did not submit your return, upon a maximum amount of 25%.
If your return is filed 60 days late, you’ll face an additional 100% of your past-due balance or $210 (the lesser of the two amounts), in addition to any existing penalties.
The penalty rises to 15% of the tax amount each month or portion of a month if the IRS determines that you submitted false information to the IRS in order to avoid paying your taxes.
Note: The IRS must, however, offer convincing and compelling evidence of fraud in order for this penalty to become effective.
Late Payment Penalty
If you file your taxes but don’t pay the remaining amount due by the deadline, you’ll be charged a penalty of 0.5 percent of your balance each month or part of a month that it goes unpaid.
If you pay 90% or more of your balance on time, the IRS will grant you an automatic six-month extension to settle the rest. When you get a Notice of Intent to Levy from the IRS, the penalty increases to 1% per month.
Notice of Intent to Levy: What does notice of intent to levy mean?
The IRS will begin seizing your property if you don’t pay your tax obligation after six months of nonpayment. This allows the IRS to take legal possession of your house, automobile, and/or bank account until you pay off your tax debt.
When the IRS intends to seize your property to pay off past-due taxes and penalties, you will get a Notice of Intent to Levy.
If you want to appeal, you must do so in writing within 30 days of the date of this notice. The notice will tell you how to file an appeal and give instructions on how to do so. It also explains the levy and the alternatives available to you if you have back tax problems.
If you are being targeted for an IRS levy, you should always seek legal assistance from a tax attorney who can assist you during the appeal process.
IRS can levy:
- Your home
- bank accounts
- Social Security payments
- retirement benefits
- commissions, and
- even advances from your employer for business travel costs.
If you submit a tax return with errors that affect your balance, you may be fined 20% of the past-due amount as an accuracy penalty. This penalty is charged if:
You do not disclose a foreign asset.
- You claim a deduction or benefit for an improper transaction.
- Your calculated tax liability was much lower than the correct amount.
- Your return shows disregard of tax law and/or negligence.
A tax audit is an examination of your tax records by the IRS to verify their accuracy. If mistakes are discovered during a tax audit, it might result in a penalty.
Gross misstatements, for example, are the worst kinds of errors that may arise during an audit and result in a penalty of 40% of the back taxes. These include:
- A failure to respect the tax code or a lack of reasonable care might be called negligence, which entails no attempt to follow the law.
- If you owe more than $5,000 in back taxes or 10 percent of your total bill, whichever is greater, you may be required to pay a prepayment penalty.
- An organization must also avoid substantially overstating the value of donated property or understating the value of depreciable assets.
- Overstating pension liabilities by at least 200 percent.
- Understating the value of a gift or estate at less than 65 percent of the fair market value, resulting in tax understatement of at least $5,000.
- If you make a statement that is less than the truth, this might be a sign that you are trying to avoid paying taxes.
Penalty on Unpaid Withheld Taxes
Employers are required by law to withhold certain taxes from their employees’ paychecks and deliver them to the IRS. If these funds are not remitted, the government will impose a 100 percent civil penalty on the entire amount.
Penalties also apply to people who had control and custody of the funds that were kept from the IRS but not paid, including not just the firm, but also personal responsibility for company officials and staff.
Estimated Tax Penalty
Most individuals pay taxes throughout the year, since they are collected from our salaries by an employer and sent to the IRS.
However, some people, like freelancers and certain businesses, have to make estimated tax payments throughout the year.
Failure to make the required estimated payments might result in a penalty calculated according on the number, amount, and deadline of due dates.
The IRS will not waive this specific penalty unless there is a genuine emergency. It may, however, be waived in the event of a disaster or other serious reasons.
Failure To Deposit Penalty
For failing to make a tax deposit by the required deadline, you will be fined 2% of your account balance. It ranges from 2 to 10 percent, depending on how late the deposit is submitted. If notifications are disregarded repeatedly, the penalty can reach up to 15%.
Failure To File W2 and W3 Forms
Businesses may incur civil penalties for failure to file forms W2 and W3. Your employees must receive their W2 forms for the previous tax year by January 31. The
If you fail to submit these forms by the deadline, your business will be assessed a penalty of $50 per form if you file within 30 days of the due date, $100 per form if you file between March 1 and August 1, and $260 per form if you file after August 1.
The maximum penalties are
- $536,000 per year or
- $187,500 for small businesses for $50 penalties,
- $1,609,000, or $536,000 for small businesses for $100 penalties
- and $1,072,500 a year for small businesses and
- $3,218,500 annually for other businesses for $260 penalties
Small businesses are those with less than $5 million in gross receipts in the past three tax years.
If you have 250 or more W2 and W3 forms to submit, they must be e-filed. Even if you hire a payroll firm to do so, you are responsible for filing forms on time.
Dishonored Check Penalty
If the IRS receives a bounced check from your bank, you will be penalized.
The IRS penalty is equal to 2 percent of the payment amount if the check was for more than $1,250 and the lesser of $25, or the full payment amount if the check was for less than $1,250.
Frivolous Tax Submission Penalty
If the IRS determines that you made a frivolous return, you may be fined up to $5,000. This type of return is sometimes submitted by individuals who protest the tax system and include incorrect or intentionally misleading information.
Failure To Provide Foreign Information Penalty
You must disclose your CFC holdings to the IRS by submitting Form 5471 if you own shares in a controlled foreign corporation. Each violation comes with a fine of $10,000 to $50,000 and the loss of any foreign tax credits.
The Form 5472 is used when more than 25 percent of a US company’s shares are owned by foreign persons. This form has a $10,000 penalty for failure to file, which rises by $10,000 for each month you fail to submit.
If you contribute to, or receive property from, a foreign trust and get a tax benefit or profit, you must disclose this information on Form 3520 or -A or face a 35 percent penalty. If you are required to submit Form 925, not completing the form can result in a 10% penalty for each transaction up on a maximum of $100,000.
Tax Penalty Assistance Program
The IRS may assist you in paying back taxes in certain cases, such as when you have an outstanding tax debt. For instance, the following penalties are eligible for IRS back tax relief:
- Failure to deposit taxes as required.
- Failure to pay taxes.
- Failure to file a tax return.
The IRS offers hardship relief to individuals who were unable to comply with their tax obligations as a result of circumstances beyond their control, such as a natural disaster, fire, serious illness or incapacitation, the death of a family member, or difficulty in obtaining documents.
A penalty waiver is not automatically granted because you do not have the money to pay your fine. However, lack of funds due to one of the reasons mentioned above might qualify. You will need to submit documentation demonstrating the incident in question, such as legal and court records, hospital records, and other evidence where applicable.
Abatement penalty assistance programs
If you have an arrangement in place to pay back your overdue tax and have filed all outstanding returns or are covered by an authorized extension, but have not received any penalties for the previous three years, you may be eligible for first-time abatement penalty reduction programs.
The ideal course of action is to settle your past-due amount before requesting aid under this section.
Eligible for back tax assistance
If the IRS makes an administrative error, you may be eligible for back tax assistance as well as associated penalties if you received incorrect advice from the IRS. This is known as penalty assistance due to statutory discretion and is available if you receive wrong advice from the IRS.
To obtain this type of abatement, you must include the original written request for advice, the incorrect written advice you received in response, and the documents indicating the penalty and/or additional tax that were charged based on this incorrect advice.
Request penalty back tax assistance
To request penalty back tax assistance from the IRS, file Form 843, Claim for Refund and Request for Abatement.
You may appeal the IRS’s decision not to grant your penalty back tax relief request through its online tool. Interest abatement is not available, and interest will continue to accrue until your tax debt is resolved.
Help with IRS Penalties
The best approach to avoid IRS fines is to file your taxes on time and pay your outstanding balance as soon as possible.
To ensure that the return is complete and free of mistakes, you may want to have a certified public accountant or tax professional file it for you.
If you owe more than you can afford to pay at the moment, apply for an extension as early as possible. If you don’t respond to IRS emails or letters, the IRS will impose greater penalties. These steps might include:
- Applying for an installment agreement,
- Making an offer in compromise
- Seeking hardship status, known by the IRS as Currently Not Collectible (CNC).
- Applying for innocent spouse relief
Get in touch with a tax professional now if you’re facing a hefty IRS civil penalty and interest as a result of your back taxes.