IRS Penalty for Back Taxes

Owing back taxes to the IRS is not only nerve wracking, it can be expensive. The IRS imposes penalties for back taxes which can add up to substantial amounts. However, the amount of penalty depends on several factors, including the amount of tax owed and the length of time the payment has been in arrears. Other penalties apply if the taxpayer fails to files a tax return or if the IRS makes a finding of fraud or tax evasion, which can result in criminal charges in addition to tax penalties.

Failure to Pay

Taxpayers who file their returns on time but fail to pay taxes by the due date face a penalty of one--half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid. The penalties accrue until the tax is paid in full or the 25 percent maximum penalty threshold is reached, whichever occurs sooner.

If the tax remains unpaid for 10 days after the IRS has issued a notice of intent to levy, the penalty increases to 1 percent. However, the penalty rate decreases to one-quarter percent for any month in which an installment agreement is in effect for individuals who have filed their returns on time. No penalty for failure to pay applies to taxpayers who obtain an extension to file and who pay at least 90 percent of taxes owed by April 15.

Failure to File

The penalty for failure to file (and presumably, failure to pay) taxes is much higher than the penalty for failure to pay taxes owed. For tax returns due after 2008, the penalty for failure to file or for returns filed more than 60 days after the due date (including extensions) is $135 or 100 percent of the unpaid tax, whichever is smaller.The failure to file penalty does not apply to taxpayers who have received an extension for filing their taxes, unless they fail to file a return by the due date of the extension.

Civil Fraud

If the IRS makes a finding of civil fraud, a penalty of 75 percent of the underpayment due to fraud is added to the tax due. Civil fraud penalties on a joint return do not apply to an innocent spouse. If fraud is established, the IRS examiner will typically refer the case for criminal prosecution. Simple failure to pay (negligence) or ignorance of the law is not sufficient to establish fraud. The IRS also imposes penalties for negligence, which it defines as careless, reckless and blatant disregard for properly preparing a tax return or paying tax obligations.

Frivolous Return

A frivolous return is a return without sufficient information to correctly calculate the proper tax, or which contains information that is clearly and deliberately misleading or incorrect. The penalty also applies for returns based on frivolous claims (such as many groups that question the legality of the IRS to collect tax) or any other return that interferes with the proper collection of taxes owed. The penalty for a frivolous return is $5,000 in addition to the proper tax and any other penalties applied. For joint returns, if both spouses are involved with a frivolous return, each spouse will be levied a separate $5,000 penalty.

Substantial Underpayment

The IRS also imposes a penalty for substantial underpayment of estimated taxes. The penalty applies for individual taxpayers if the underpayment is at least 10 percent of the correct tax or $5,000, whichever is larger. The substantial underpayment penalty may be avoided if the taxpayer is able to provide a reasonable basis for having paid the inadequate amount.