Avoiding the IRS Accuracy Penalty
The IRS accuracy penalty is a charge that the IRS imposes on taxpayers who file inaccurate tax returns. The penalty is equal to 20% of the amount of taxes that are owed as a result of the inaccuracies. This can be a hefty amount so it’s worth considering what you can do to minimize their potential.
What is the biggest cause of the IRS Accuracy Penalty?
The biggest cause of the accuracy penalty is underreported income. Computer software matches all the 1099s and W-2s reported by 3rd parties to the tax returns and automatically generates a CP2000 Notices proposing changes for anything not on the return.
How can you avoid the IRS Accuracy Penalty?
The easiest and surest way to avoid matching problems is to file an extension and check your IRS transcripts when the income and wages are posted in early June.
If you need to file before June, it’s still a good practice to check the income and wage transcripts. Should you find a difference, immediately amend the original return with a 1040X. A timely correction makes it very hard for the IRS to claim you were negligent.
What about Information Return Errors?
The IRS process millions of information returns and a fair number of them are in error. In theory, it’s up to you to contact the 3rd party issuer and ask them to correct their filing. Lots of luck with that approach. The fallback is to make sure that your return reflects the total income reported. Then deduct the error with a note on the return explaining the error.
Conclusion
The accuracy penalty can be big bucks. Avoiding the penalty is far easier than dealing with them after the IRS finds unreported income and automatically assesses the penalty.
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