Understanding Tax Penalties - El Cerrito, CA

By Ralph Nelson, EA, Kenny Kim, EA, MD

The IRS imposes tax penalties, including interest, if the taxpayer does not file or pay the tax on time or misrepresents their tax liability. We want to discuss four of the most frequent tax penalties and what can be done to have them canceled or reduced.

1. Failure-to-File Penalty

The IRS failure-to-file penalty is a fine assessed when a taxpayer does not file their taxes on time. The IRS late filing penalty is 5% of the unpaid taxes per month and could add up to 25% of the unpaid taxes due.

2. Failure-to-Pay Penalty

The IRS failure-to-pay penalty is a penalty that can be as much as 0.5 percent to 1% of the unpaid tax bill for each month where taxes aren't paid and can be up to 25% of the outstanding tax balance.Note that the failure-to-pay penalty amount may be reduced when the taxpayer failed to file and pay (#1 and #2 penalties). If the taxpayer has a "reasonable cause" for the failure to file/pay, all or portion of the penalties may be forgiven.

3. Accuracy-related penalty

The IRS may assess an accuracy-related penalty for any significant underreporting of tax. For example, you have a 1099 income which you forgot to report. When the IRS finds out about it, they could assess 20% of the amount that should have been assessed based on the underreporting.

4. Civil fraud penalty

If the IRS determines that income has been misreported with fraudulent intent, a penalty of 75% of the underpayment amount may be imposed. Some income may be invested by the criminal investigation division of the IRS and may be charged with tax fraud.The fundamental approach to having the penalty reduced or waived is to provide a compelling case that the reason for the penalties was "reasonably accidental." We have over a decade of expertise as a tax resolution firm assisting clients with penalty abatement.

If you have any questions about IRS tax penalties or other IRS tax issues in the Bay Area, please feel free to contact us at (510) 828-6215 (Ralph); (341) 766-1247 (Kenny) or by checking out our website, www.financial-harmony.com