Penalties for Underpaying Taxes
The penalties for underpaying your U.S. federal individual income taxes vary from reasonable fines to criminal penalties, depending on how much you owe and the circumstances surrounding your underpayment. In some cases you may be able to get away with paying no penalty at all. Read on to find out what penalties apply to what circumstances.
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Late Penalties
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It is important to distinguish between penalties for paying late and for filing late. Since these two often go hand in hand, the IRS has separate sets of penalties for each.
The penalty for non-payment or underpayment of your income taxes is 0.5 percent of the overdue amount for each month or portion of a month that they are overdue up to a maximum of 25 percent. The penalty for failure to file is 5 percent for each month or portion of a month that your tax return is late up to a maximum of 25 percent. If your return is 60 days late or more there is a minimum penalty of $100 or 100 percent of the overdue amount, whichever is less.
However, the IRS will not assess both penalties against you at the same time---if you are liable for both you will have to pay only the larger of the two penalties.
Filing a Frivolous Return
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The IRS may assess a penalty of $500 if you file a tax return that does not include enough information to correctly calculate your tax liability, includes frivolous arguments for reducing your tax liability, or is prepared in a manner designed to confuse or delay the proper assessment or collection of taxes. In all cases it is assumed that the taxpayer has used these methods as a device to underpay taxes. Put simply, the IRS will assess this fine if it feels that you are purposely trying to mislead it.
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Negligence
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The IRS will assess a penalty of 20 percent of your overdue tax liability if you underestimate what you owe as a result of negligence or blatant disregard of IRS tax regulations, or if you significantly understate the amount of tax due (by at least 10 percent, or at least $5,000, whichever is less). This penalty is not designed to punish taxpayers for making understandable errors but to discourage blatant disregard or carelessness.
The "Reasonable Cause" Exception
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Even if you have underpaid your taxes and the IRS has assessed penalties on the unpaid amount you may be able to convince the organization to waive them if you can show "reasonable cause" for your failure to pay. Although lack of money is not considered reasonable cause, death in the immediate family, a fire that destroys your home, or civil disturbances in your area may be accepted as valid excuses.
Tax Evasion
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The IRS views negligence and willful understatement of tax liability very differently. While the former can result in civil liability, the latter can result in a prison sentence. Tax evasion occurs when a taxpayer intentionally understates his tax burden or attempts to hide income or assets from the IRS. The key concept in tax evasion is intent---you are not likely to be charged with tax evasion unless you have deliberately attempted to deceive the IRS or made intentionally false statements on your tax return. Failure to file a tax return is not considered tax evasion absent unusual circumstances.
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