Civil penalties are the most common method used by the Internal Revenue Service to address tax law violations. The most common violation is failure to file taxes. Receiving a notification in the mail citing a civil penalty or fine is intimidating, especially if you do not understand what you did wrong. Consider this brief guide to civil penalties and the steps you can take to lessen the situation. You can also reach out to a tax attorney to learn more about the specifics of your case.
What Distinguishes a Civil Penalty From a Criminal Penalty?
Civil and criminal tax penalties are not the same, but they are also not mutually exclusive. Under certain circumstances, someone can face civil and criminal penalties for tax crimes. Civil penalties are non-criminal and generally resolve with payment of fines plus interest. The line between civil and criminal can blur, but criminal cases tend to fall under the umbrella of tax evasion in extreme proportions.
Fraudulent deductions and significant unreported income classify as criminal tax evasion. However, someone charged with tax evasion may also face civil penalties. Ultimately, the IRS has the right to determine whether to impose civil or criminal penalties on a case-by-case basis.
What Are the Civil Penalties From the IRS?
There are 14 common civil penalties for tax violations. Once you receive a violation, interest accrues on the monetary value of your penalty until you pay. The fine depends on the penalty and what you owe the federal government in taxes. Most penalties relate to delinquency, failure to file, or accuracy errors in your paperwork.
Failure To File or Pay
The annual file date for income tax returns is April 15. If you fail to file by that date, the IRS can take a percentage of your total tax bill each month until you file. You may also face a penalty of an additional $210 or less if your return is three months late or longer. In addition, fines can increase to as much as 75% of your total bill monthly in interest if your reason for not filing is fraud-related.
Filing your taxes often requires making a payment. You can do so immediately or request other payment options, such as installments. However, if you miss the deadline, the IRS will charge 0.5% of your balance owed monthly until you are current. If you miss a payment after paying 90% of the balance owed, you can get an additional six months to pay the remaining balance without accruing interest. Other penalties related to payment include the dishonored check penalty and the frivolous tax submission penalty.
If you write a check for more than $1,250 to the IRS and it bounces due to insufficient funds, the penalty is 2% of the amount you owe. If the check were less than $1,250, the penalty would reflect the total amount, effectively making you pay double. Additionally, people who protest the tax system by purposefully filing an incomplete form or a form with incorrect information can face a $5,000 fine for frivolous tax submission.
Other Penalties Related to Delinquency
A person can fail to pay adequate federal income tax in multiple ways. Tax delinquency can result in substantial financial consequences, sometimes as the result of unintentional neglect. Specific civil penalties and their circumstances include the following:
- Notice of intent to levy. The IRS can put a levy on your property, including your bank account, real estate, and vehicle, meaning they can seize it to pay past-due taxes. Once you receive the notice, you have 30 days to pay and avoid property loss.
- Unpaid withheld taxes. Employers must remit all taxes withheld from employee checks or face a penalty equaling 100% of the funds withheld. Failure to comply risks personal liability as well.
- Failure to deposit. When a business fails to make regularly scheduled deposits of taxes in the correct amounts, the penalties vary. For example, they pay 2% up to five days later, 5% up to 15 days late, and 10% for deposits made more than 15 days late.
- Failure to provide foreign information. If you own shares in a foreign company, failing to report that income could result in penalties of $50,000 for each offense. Failure to file the 5471 form carries a $10,000 fine plus $10,000 for each month you do not file.
Business owners and executives can face civil tax penalties, as noted under the unpaid tax withheld and failure to deposit penalties listed above.
Failure To File W2 and W3 Forms
They are also responsible for providing W2 and W3 forms to employees by January 31 of the following year. Failure to file these forms accrues a penalty per form based on the length of the delay. For example, filing within 30 days after January 31 is a fine of $50 per form. Filing between March 1 and August 1 accrues a $100 fine per form. Finally, filing after August 1 constitutes a $260 fine per form.
Penalties cap under the following circumstances:
- $187,500 total in $50 fines for small businesses and $536,000 for larger businesses
- $536,000 total in $100 fines for small businesses and $1.609 million for other businesses
- $1.0725 million total in $260 fines for small businesses and $3.2185 million for other businesses
Additionally, businesses with more than 250 W2s or W3s must file them electronically, and the company is still liable for penalties if an outsourced accounting firm handles payroll and tax responsibilities.
Penalties Related to Accuracy
Tax returns with errors are not uncommon. If the IRS determines you made a mistake when filing your return and miscalculated it, you may face a charge of 20% of the amount you did not reflect on your return. Common inaccuracies include tax liability miscalculations, failure to disclose a foreign asset, disregarding tax law, or falsely claiming a deduction or benefit.
If the IRS flags your return to assess for inaccuracies, this is an audit. Some misstatements constitute a civil penalty of 40% of the total back taxes owed. Examples of these mistakes include:
- Unstating reportable transactions, an action known as tax sheltering
- Making no good faith attempt to follow tax regulations
- Understating the value of an estate or gift by at least $5,000
- Overstating the value of property received in donation or understating the value of depreciating property
- Providing a 200% overstatement of pension liabilities
Audits can be an excruciating process. If you receive notification that the IRS will commence an audit of your tax returns, you may benefit from speaking with a tax professional.
How Can You Avoid Civil Penalties From the IRS?
The easiest way to avoid civil tax penalties is to have a tax professional complete and file your tax return before the annual deadline and pay any owed amount on time. If you owe more than you can even afford to pay in installments, you have options. For example, you can attempt a settlement negotiation to lower your amount owed with the help of an experienced attorney.
You can seek hardship status, which signals to the IRS that your amount owed is not currently collectible, but you are responsible for providing evidence to support your claim. If your spouse is solely responsible for the debt, you can apply for innocent spouse relief.
Can a Tax Attorney or Relief Team Help You?
Civil penalties can have substantial financial repercussions. Taxpayers facing financial struggles related to their returns do not need to face the IRS alone. You may not know what you should or should not say to lead the outcome of your case in your favor. A legal tax relief team can help you evaluate your situation and determine the best legal course of action.
If you received notification of a civil penalty from the IRS or need assistance understanding your taxes, contact Tax Relief System to schedule a consultation today.