What Type of IRS Tax Penalties Are There?

On: May 3, 2019

April 15 is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.

Here are eight important points about penalties for filing or paying late.

1. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.
3. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
4. If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.
5. If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.
6. If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.
7. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

Other Penalties:

The Trust Fund Recovery Penalty (TFRP)

The Trust Fund Recovery Penalty (TFRP) is any tax that you hold “in trust” to be paid to the government. For example, if you have employees, you withhold money from your employee paychecks to pay their taxes to the IRS. You might also collect sales or excise tax when you sell goods and you are holding this sales/excise tax to then be deposited over to the government. In short, you act as the collector of the taxes and it is your responsibility to turn the money over to the government by certain deadlines. If you fail to do so, the government will view this as just a notch below robbery. You collected their money but didn’t actually give to them.

That is the exact reason that the IRS and many states have the Trust Fund Recovery Penalty. Whoever is holding the money or spent the money must be held accountable for paying the government back what it was owed. If one of your employees gets a tax refund at the end of the year from the IRS, the IRS is obligated to pay your employee that money, even though the IRS never actually received the tax money. The IRS loses a lot of money on the deal, and they are going to go after whoever they can to collect on this debt.

Underpayment of Estimated Tax By Corporations

Form 2220 is used by corporations, certain tax-exempt organizations, and private foundations to determine whether they are subject to the penalty for underpayment of estimated tax, and if so, the amount of the penalty. Corporations, tax-exempt organizations subject to the unrelated business income tax, and private foundations use this form to determine whether they are subject to the penalty for underpayment of estimated tax and, if so, the amount of the underpayment penalty for the period that applies

Civil Fraud Penalty or Criminal Prosecution

Investors of abusive tax schemes that try to escape their legal tax responsibilities are still liable for taxes, interest, and civil penalties. Violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty or criminal prosecution. Civil fraud can include a penalty of up to 75% of the underpayment of tax attributable to fraud, in addition to the taxes owed. Criminal convictions of promoters and investors may result in fines up to $250,000 and up to five years in prison.

Penalties Applicable to Tax Exempt Organizations

If an organization fails to file a required return by the due date (including any extensions of time), it must pay a penalty of $20 a day for each day the return is late.  The same penalty applies if the organization does not give all the information required on the return or does not give the correct information.

In general, the maximum penalty for any return is the lesser of $10,000 or 5 percent of the organization’s gross receipts for the year.  For an organization that has gross receipts of over $1 million for the year, the penalty is $100 a day up to a maximum of $50,000.

If the organization is subject to this penalty, the IRS may specify a date by which the return of correct information must be filed.  If the return is not filed by that date, an individual within the organization who fails to comply may be charged a penalty of $10 a day.  The maximum penalty on all individuals for failures with respect to a return shall not exceed $5,000.

Please note: Automatic revocation occurs when an exempt organization that is required to file an annual return (e.g., Form 990, 990-EZ or 990-PF) or submit an annual electronic notice (Form 990-N, or e-Postcard) does not do so for three consecutive years. Under the law, the organization automatically loses its federal tax exemption.

Penalties for failure to file may be abated if the organization has reasonable cause for the failure to file timely, completely, or accurately.