What You Need to Know if You’re Facing an IRS Civil Penalty


Staff Writer - Angela
October 17, 2018

An IRS civil penalty is the fine imposed by the Internal Revenue Service on taxpayers who fail to abide by their legal regulations. This is in contrast to a criminal penalty such as jail time. Although the IRS has established more than 140 civil penalties, a few are much more common than others. Interest accrues on the penalty amount, as well as on the amount of your past due balance.

Failure to File Penalty

This type of IRS civil penalty is charged to those who do not file a tax return by the annual due date, which is typically April 15 of the following tax year. The cost of this civil penalty is 5% of your total tax bill for each month or partial month in which you failed to file your tax return, up to a maximum of 25%. An additional penalty of 100 percent of your past-due balance or $135 is added if your return is filed 60 days late.

If the IRS finds that you failed to file your taxes due to fraud, the penalty jumps to 15% per month or partial month, capped at 75% of the total tax bill. However, the IRS must present clear and convincing evidence of fraud for this penalty to take effect.

Late Payment Penalty

If you file your taxes but don’t pay the balance due by the deadline, you will be charged a fine of 0.5% of your balance per month or partial month it is unpaid. However, if you pay 90% or more of your balance on time, you get an automatic six-month extension to pay the remainder. Once you receive a Notice of Intent to Levy from the IRS, the penalty is increased to 1% per month.

Notice of Intent to Levy

Another IRS civil penalty is the Notice of Intent to Levy. After six months without paying your taxes, the IRS will begin the process of placing a levy on your property. This gives the agency a legal claim on your home, vehicle, and/or bank account until your tax balance is paid.

Accuracy Penalty

If you submit a tax return with errors that affect your balance, you may be charged 20% of the past-due amount as an accuracy penalty. This fine is assessed if:

  • You do not disclose a foreign asset
  • You claim a deduction or benefit for an improper transaction
  • Your calculated tax liability was much lower than the correct amount
  • Your return shows disregard of tax law and/or negligence

Audit Penalties

An audit is a process in which the IRS examines your tax records carefully to discern their accuracy. This sometimes leads to an accuracy penalty if errors are found. Certain types of accuracy penalties that stem from an audit are characterized as gross misstatements, and as such carry a fine of 40% of the tax debt. These include:

  • Negligence or disregard of regulations, in which no good faith attempt is made to follow the tax code
  • Understating your tax debt by more than $5,000 or 10% of your total bill, whichever is greater
  • Substantially overstating the value of donated property or understating the value of property that is depreciating
  • Overstating pension liabilities by at least 200%
  • Understating the value of a gift or estate at less than 65% of the fair market value, resulting in tax understatement of at least $5,000
  • Understatements related to reportable transactions, which could signify tax sheltering

Penalty on Unpaid Withholding Taxes

Employers are required to withhold certain taxes from the paychecks of their employees and submit these funds to the IRS. Failure to remit these funds after they are withheld carries a 100% civil penalty on the full amount. Penalties extend to those who shared control and custody of the funds that were withheld but not paid to the IRS, including not only the company itself but also personal liability for business officers and employees.

Penalty Relief

The IRS offers possible relief for certain types of IRS civil penalties, including but limited to:

  • Failure to deposit taxes as required
  • Failure to pay taxes
  • Failure to file a tax return

Reasonable cause IRS civil penalty relief is a waiver of fines given to those who were unable to meet their tax obligations for reasons beyond their control, such as natural disaster, fire, serious illness or incapacitation, the death of a family member, or inability to obtain records. Lack of funds alone is not considered reasonable cause for a penalty waiver, although lack of funds caused by one of the situations described above may qualify.  You will need to provide documentation of the event in question, including legal and court records, hospital records, and other proof where applicable.

You may be eligible for first-time abatement penalty relief if you have made an arrangement to pay your past-due tax, you have filed all outstanding returns or are covered under an approved extension, and you have not received any penalties for the previous three tax years. The best course of action is to fully pay your past-due balance before requesting relief under this provision.

If the IRS has made an administrative mistake, you may also be eligible for relief of associated penalties. This is called penalty relief due to statutory exception and is given if you receive incorrect advice from the IRS. When requesting this type of abatement, you must include the original written request for advice, the incorrect written advice you received in response, and the documents indicating the penalty and/or additional tax that were charged based on this erroneous advice.

To request IRS civil penalty relief from the IRS, file Form 843, Claim for Refund and Request for Abatement. If your penalty relief request is denied, you can appeal the IRS decision using its online tool. Abatement for interest is not available and the interest will continue to accrue until your tax debt is fully paid.

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