The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion. These are designed to foster compliance.
Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included).
Our last two post cited four penalties. Below we have outlined two other penalties that the IRS assesses.
Penalty for substantial understatement : 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 a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The position must be more than just merely arguable or merely a colorable claim. The position must be reasonably based on authority supporting the position
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. The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.
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.
For tax help ascertaining the validity of a penalty or if the computation is correct, or for assistance with penalty abatement, please contact us at 201-947-8081 or 646-688-2807, or email us at firstname.lastname@example.org.