Other IRS tax penalties include:
Accuracy Related Penalties
The two most common accuracy related penalties are the “substantial understatement” penalty and the “negligence or disregard of the rules or regulations” penalty. These penalties are calculated as a flat 20 percent of the net understatement of tax.
Penalty for Substantial Understatement of Taxes
You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000 for individuals. For corporations, the understatement is considered substantial if the tax shown on your return exceeds the lesser of 10 percent (or if greater, $10,000) or $10,000,000.
You may avoid the substantial understatement penalty if you have substantial authority for your tax treatment of the item or through adequate disclosure. To avoid the substantial understatement penalty by adequate disclosure, you must properly disclose the position on the tax return and there must at least be a reasonable basis for the position.
To properly disclose the position, complete and attach IRS Form 8275 to your tax return and disclose all relevant facts. A reasonable basis is one that has approximately 10 percent or greater chance of success if challenged. This means that the position must be more than just arguable. There must be some authority supporting the position.
Penalty for Negligence and Disregard of the Rules and Regulations
“Negligence” includes (but is not limited to) any failure to:
- make a reasonable attempt to comply with the internal revenue laws
- exercise ordinary and reasonable care in preparation of a tax return or
- keep adequate books and records or to substantiate items properly
This penalty may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations – by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect.
You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith.
Civil Fraud Penalty
If there is any underpayment of tax on your return due to fraud, a penalty of 75 percent of the underpayment due to fraud will be added to your tax. Negligence or ignorance of the law does not constitute fraud. Typically, IRS examiners who find strong evidence of fraud will refer the case to the Internal Revenue Service Criminal Investigation Division for possible criminal prosecution. Keep in mind that both civil sanctions and criminal prosecution may be imposed.
Frivolous Tax Return Penalty
You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. If you jointly file a frivolous tax return with your spouse, both you and your spouse each may have to pay a penalty of $5,000. A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. This penalty is added to any other penalty provided by law.
Penalty for Bounced Checks
If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2 percent of the amount of the check – unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.
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