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

Andrea Miller
Expert Contributor
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  • Civil penalties are usually monetary fines imposed for those who fail to meet obligations such as filing and paying taxes.
  • Most IRS fines are assessed as a percentage of the outstanding debt rather than as a flat fee.
  • Although it is almost impossible to avoid penalties if you can’t afford to pay your past-due taxes, you can take steps to minimize your liability.

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 tim…….e. Although the IRS has established more than 140 civil penalties, a few are much more common than others. When you receive an IRS penalty for failure to pay or file taxes, interest accrues on the penalty amount as well as on the amount of your past due balance.

Failure to File Penalty

This fine 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 percent 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 percent. An additional penalty of 100 percent of your past-due balance or $210 (the lesser of the two amounts) 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 percent per month or partial month, capped at 75 percent 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 percent of your balance per month or partial month it is unpaid. However, if you pay 90 percent 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 percent per month.

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. You will receive a Notice of Intent to Levy when the IRS plans to seize your property to pay your past-due taxes and penalties.

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

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After you receive this notice, you have 30 days to take action before the levy takes effect. The notice will explain your right to appeal and give you instructions on how to do so. It also explains the reason for the levy and the options you have to resolve your back tax issues. You should always consult with a tax attorney who can advocate on your behalf during the appeal process if you are facing an IRS levy.

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Items that can be levied by the IRS include your home, car, bank accounts, wages, Social Security payments, retirement benefits, commissions, and even advances from your employer for business travel costs.

Accuracy Penalty

If you submit a tax return with errors that affect your balance, you may be charged 20 percent 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 percent of the back taxes. These include:

  • Negligence or disregard of regulations, in which no good faith attempt is made to follow the tax code.
  • Understating your back taxes by more than $5,000 or 10 precent 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 percent.
  • Understating the value of a gift or estate at less than 65 percent 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 Withheld 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 percent 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.

Estimated Tax Penalty

Most people pay taxes throughout the year because they are withheld from our paychecks by an employer, then remitted to the IRS. However, freelance workers and certain other individuals and businesses are required to make estimated tax payments throughout the year. Failure to do so can carry a penalty calculated depending on the number, amount, and deadline of required estimated payments. This type of penalty cannot be waived for reasonable cause, although it may be waived in the case of a disaster and other serious circumstances.

Failure To Deposit Penalty

This penalty is charged for failure to deposit taxes by the established deadline. It ranges from 2 to 10 percent depending on how late the deposit is completed. If notices are continuously ignored, the penalty can be as high as 15 percent.

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Failure To File W2 and W3 Forms

Businesses may incur civil penalties for failure to file forms W2 and W3. Your employees must receive their W2 forms for the previous tax year by January 31. If you fail to submit these forms by the deadline, your business will be assessed a penalty of $50 per form if you file within 30 days of the due date, $100 per form if you file between March 1 and August 1, and $260 per form if you file after August 1.

The maximum penalties are $536,000 per year or $187,500 for small businesses for $50 penalties, $1,609,000, or $536,000 for small businesses for $100 penalties, and $1,072,500 a year for small businesses and $3,218,500 annually for other businesses for $260 penalties. Small businesses are those with less than $5 million in gross receipts in the past three tax years.

Keep in mind that if you are responsible for filing more than 250 W2 and W3 forms, they must be e-filed. You are responsible for filing forms on time even if you rely on a payroll company to complete this function.

Dishonored Check Penalty

You will be charged this penalty if you write a check to the IRS and it is returned by your bank for insufficient funds. This penalty is equal to 2 percent of the payment amount if the check was for more than $1,250 and the lesser of $25, or the full payment amount if the check was for less than $1,250.

Frivolous Tax Submission Penalty

If the IRS finds that you filed a frivolous tax return, you could face a penalty of up to $5,000. This type of return is sometimes filed by those who protest the tax system and may include incomplete or purposely incorrect information.

Failure To Provide Foreign Information Penalty

If you own shares in a controlled foreign corporation, you must report these shares to the IRS by filing Form 5471. Failure to do so carries a penalty of $10,000 to $50,000 for every offense and may also result in the loss of your foreign tax credits. Form 5472 must be used when more than 25 percent of a U.S. corporation’s shares are held by foreign individuals. This form has a failure to file penalty of $10,000, which increases by $10,000 for every month in which you fail to file.

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If you benefit from or make property transfers to a foreign trust, you must report this information on Form 3520 or 3520-A or face a 35% penalty. If you are required to file Form 925, failure to do so can carry a 10% penalty for each transfer up to a maximum of $100,000.

Tax Penalty Assistance Program

The IRS offers possible back tax assistance for certain types of penalties, including but limited to:

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

Reasonable cause penalty assistance 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 assistance programs 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 assistance under this provision.

If the IRS has made an administrative mistake, you may also be eligible for back tax assistance of associated penalties. This is called penalty assistance 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 penalty back tax assistance from the IRS, file Form 843, Claim for Refund and Request for Abatement. If your penalty back tax assistance 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 back tax amount is fully paid.

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Avoiding IRS Penalties

The only foolproof way to avoid IRS penalties is by filing your tax returns on time and paying your balance in full and on time whenever possible. You may also want to have a certified public accountant or tax professional prepare the return on your behalf to ensure that it is complete and free of errors.

If you owe more than you can currently afford to pay, you should apply for an extension as soon as possible. Taking proactive steps to resolve your tax issues will result in lower penalties than if you fail to respond to IRS notices. These steps can include:

  • Applying for an installment agreement, which cuts your monthly late penalty in half (1% instead of 2%). Collection activity will cease, including levy of your property, as long as you make the payments as agreed.
  • Making an offer in compromise, in which you attempt to negotiate a settlement of your back taxes for less than the full amount owed. Fewer than half of offers in compromise were accepted by the IRS in 2016, so you should seek the advice of a tax attorney if you plan to go this route. He or she can help you craft an offer that is more likely to be accepted.
  • Seeking hardship status, known by the IRS as Currently Not Collectible (CNC). This requires you to prove that you would face undue hardship if the IRS attempted to collect your back taxes.
  • Applying for innocent spouse relief, which removes the debt from your record if you are able to prove that your spouse was solely responsible for the back taxes in question and you can meet certain other criteria.

If you’re facing steep IRS civil penalties and interest because of your back taxes, get in touch with the team at Solvable today. We can match you with vetted programs to help resolve your tax, credit card, and student loan debt for a bright financial future.


Andrea Miller
Expert Contributor
Last Updated: