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The IRS imposes negligence penalties on taxpayers who have improperly submitted their taxes or underpaid what they owe. Negligence penalties are often included when the IRS performs an audit. For underpayment, a tax negligence penalty may result in a charge of 20% the value of your unpaid taxes. Depending on your personal tax bill, this may come out to a hefty sum.
In this post, we will cover IRS negligence penalties, how they may be incurred, what you should do if you receive one, and your best strategies to work toward IRS negligence penalty abatement. Here is a list of topics you’ll find in this post.
- What is an IRS Negligence Penalty?
- What are the Different Forms of Negligence?
- What to Do If You Receive A Negligence Penalty
- Getting Help from a Professional
Let’s start by defining IRS negligence penalties.
What is an IRS Negligence Penalty?
IRS negligence penalties are a way the IRS ensures that taxpayers fully and correctly report their income and other tax information when filing taxes. Negligence penalties are often issued when the IRS performs an audit on your tax return. For instance, if you underpay your taxes and incur an audit, you may also be subject to a tax negligence penalty — this charge may be up to 20% of the taxes you still owe, in addition to fully paying those taxes.
In order to understand the purpose of negligence penalties and when they may be incurred, it’s important to first understand what an audit is. An IRS audit is a review of an individual or organization’s tax documents to ensure that all reported information is accurate, and that necessary information has in fact been reported. Audits are relatively uncommon for individual taxpayers, but they do happen.
IRS audits can sometimes occur randomly as part of the IRS’s general quality assurance and internal consistency programs. However, you may also be subject to an audit and audit penalties if there is anything on your tax returns that the IRS deems suspicious.
One common example is unreported income. Let’s say that, in addition to a full-time job, you also work part time to earn a little extra cash. If you fail to report that extra income on your taxes when you file, you may be subject to an audit. Or, if you’ve made money from the sale of investments or property, and do not list this income when filing (or, even worse, you do not pay taxes on it) you may also be subject to an audit.
In either of these cases, it’s likely that you may also face negligence penalties along with the audit. In the next section, we will go over the various errors that can lead to a negligence penalty.
What are the Different Forms of Negligence?
Taxes are complicated and there is no shortage of ways you may accidentally misreport or forget to include relevant information when filing a return. Below are a few of the different kinds of negligence that the IRS is on the lookout for when auditing an individual or business’s tax returns.
Negligence types
- Inaccurate representation of tax situation: If you inaccurately report features of your tax situation, like whether you qualify for certain deductions and tax credits, you may be subject to a negligence penalty. It’s important to read qualifying criteria for each deduction and credit carefully before claiming any.
- Unreported or underestimated income: As mentioned above, it’s important that, when filing your taxes, you include every source of income you had access to during the course of the tax year. That includes salary, hourly income, capital gains through investments or sale or property, as well as contract-based and freelance income.
- Failure to keep adequate tax records: The IRS requires individuals to include information from previous tax years, relevant income information like a W-2, and documentation proving that you qualify for any tax relief you may be claiming. If, upon auditing your records, the IRS finds that you have not provided sufficient documentation to prove your tax situation, you may be penalized.
- Inadequate internal controls for processing business transactions: Similarly, businesses must keep an adequate record of all taxable transactions and report these to the IRS when filing business taxes in order to avoid an audit and negligence penalties.
- Previous history of noncompliance with IRS requirements: If you have, in the past, failed to comply with IRS requirements, it may be more likely that you are penalized during an audit. The auditor will assess whether there has been a history of late payments or penalties to establish whether you have had a history of noncompliance.
- Withholding information from the IRS or from a tax preparer: The IRS may assess a tax negligence penalty if you have withheld information regarding aspects of your tax situation from them. Similarly, if you have worked with professional tax preparers, and did not provide them with the full information necessary to accurately report your tax situation when preparing your taxes, you may be penalized.
- State tax negligence: If you have also neglected to provide some necessary information on your state taxes, your state tax revenue service may also audit your return. If that happens, it may trigger a federal audit, which may in turn lead to negligence penalties if any apply.
As a general rule of thumb, it’s a good idea to thoroughly go through your taxes and ensure that all sources of income and all other relevant tax information is included before filing. If you’re uncertain, you can always work with a professional tax preparer like those available through Community Tax. Just be sure that, if you do work with a professional, you supply them with all the information they will need to fully and accurately prepare and file your taxes.
Negligence vs Fraud
Negligence can come in many different forms, as taxes are complicated and leave plenty of room for error. It’s important, however, to distinguish between negligence and fraud: this will determine whether the IRS will impose a penalty of negligence or intentional disregard is sufficient to constitute illegal fraud. Negligence is typically an honest mistake caused by not paying enough attention to your taxes when filing, or simply not realizing that you had to report a certain source of income.
On the other hand, tax fraud is the willful misrepresentation of information, often for personal gain. Intentionally using fraudulent information in your tax returns may lead to legal action from the IRS. Actions that the IRS considers fraud include:
- Falsely explaining omitted or underreported income.
- Large discrepancies between actual income and reported income, or concealing sources of income.
- Consistent errors that result in the taxpayer’s benefit, like claiming false deductions.
- Deceitful or falsified tax records, or failure to produce them at the IRS’s request.
- Willfully misrepresenting a tax situation to a tax preparer.
- Large monetary dealings not clearly associated with the taxpayer’s business.
- Verbal misrepresentation of facts.
The IRS notes that only one indication of fraud is usually not sufficient to support serious fraud allegations. However, the appearance of more than one of these indications in an individual’s tax returns may result in an investigation or accusation of tax fraud.
If you haven’t been willfully misrepresenting information on tax documents, or haven’t consistently lied about your income to the IRS, then in most cases you won’t have to worry about tax fraud. Negligence, however, might happen to anyone who happens to make a few mistakes while filling out their taxes.
Failure to Pay Taxes or File Tax Returns
It’s important to note that the consequences for failing to fully and correctly pay your taxes and submit your tax returns do not end with negligence penalties. If you are audited for failure to pay or submit your returns, you may also face further fees from the IRS.
- Failure to file fee: the IRS will charge you a fee for failing to file your taxes. You may be charged up to 5% of your tax obligation in addition to still having to pay that amount. You’ll be charged 5% each month up to a maximum of 25%. You will also be charged an additional late filing penalty (when you do eventually file) equal to the lesser of $435 or 100% of your tax obligation.
- Failure to pay fee: Failure to pay is not, by itself, a fine as failure to file, but should still be avoided. The IRS will assess a monthly fee equal to 0.5% of the amount you owe the IRS, maxing out at 25%. The rate of the monthly penalty increases to 1% a month if you still have not paid 10 days after receiving a notice from the IRS. In addition to the incurred failure to pay fees, you’ll also be charged interest on your remaining balance at the current federal interest rate plus 3%, compounded daily.
Failing to file your taxes in full, correctly, and on time can incur a wide array of possible fines and penalties. That makes it especially important to file correctly. However, if the IRS has already applied a tax negligence penalty, you’re probably wondering what to do next. Let’s cover that now.
What to Do If You Receive a Negligence Penalty
Receiving a negligence penalty when you are already experiencing a tax audit can feel exhausting and demoralizing. However, it’s important to know that there are steps you can take to mitigate the damage that a negligence penalty causes to your financial wellbeing.
You’ll likely be notified about the negligence claim from the IRS via a CP200 Notice of Underreported Income, stating that you are subject to an IRS 6662 penalty. If you made a genuine error through little or no fault of your own, and do not think that you should be responsible for paying the negligence penalty, you have the option to contest it.
Contesting the IRS Negligence Penalty
Contesting an IRS negligence penalty involves contacting the IRS, usually in response to the previously mentioned CP200 notice. When replying to the IRS, it’s important to make the case that you earnestly tried to fulfill your tax filing obligation to the best of your abilities, but were unable to fully comply due to some other circumstance that you were not in control over.
For instance, you may argue to the IRS that:
- You made isolated mathematical mistakes while filing your taxes.
- You got incorrect information from an employer, brokerage, or other source of income.
- You sincerely misunderstood instructions from the IRS or were misdirected by inconsistent information.
- You relied on a competent tax professional who made an error when preparing your return.
- Note: in this case, the IRS may choose to hear your defense and document it. However, legal precedent maintains that, though taxpayers have the right to authorize a third-party tax preparer, responsibility for their tax obligations ultimately rests with the taxpayer, not with the professional.
It’s generally a smart idea to contest your tax negligence penalty as soon as you get it, as waiting to reply to the IRS — and refusing to pay in the meantime — could lead to further penalties and legal complications. When dealing with the IRS, and especially when contesting actions they are attempting to take against you and your assets, it’s always a good idea to rigorously provide them with supporting documentation for whatever case you’re trying to make.
Thoroughly documenting your case, providing proof for your claims, and keeping track of the paper trail involved in the process is time consuming and stressful. And, by doing it yourself, you may increase the likelihood of an error that reduces your chances of successfully contesting the negligence penalty — or, even worse, possibly incurring additional penalties. Luckily, you don’t have to do it all alone. Community Tax is here to provide tax audit help.
Getting Help from a Professional
Community Tax is a trusted, experienced company that specializes in optimizing our clients’ tax situations, from small business taxes to personal tax preparation. Dealing with an IRS negligence penalty, the audit likely accompanying it, and any other fees, interest, or the possibility of legal action can be stressful and time consuming. Community Tax employs a team of experienced professionals who do what it takes to ensure you get the best deal possible from the IRS. We offer a number of services that can help you prevent or negotiate a negligence penalty.
Tax Preparation
Community Tax offers expert tax preparation services for individuals and small businesses. By employing experienced tax professionals, you minimize your risk of making critical mistakes that may lead to negligence penalties. Community Tax’s team rigorously works through the details of your tax situation to ensure your complete tax situation is reported to the IRS, thus reducing your risk of an audit.
Working with dedicated tax professionals not only reduces your audit risk, it can also increase your potential for a large IRS tax refund. That’s because, filing alone, you may not be aware of the various exemptions and credits that you’re eligible for. By working with a professional like those available through Community Tax, you can ensure that you take advantage of every tax break you deserve.
Tax Resolution
If you’re already experiencing an audit, or have incurred tax debt, interest payments, or penalties, Community Tax resolution services can help. We can walk you through everything you need to know to improve your standing with the IRS, potentially saving you from further debt and penalties. And, if you’re in debt to the IRS, Community Tax can help you make an Offer in Compromise or establish an IRS Payment Plan, so that your tax debt doesn’t cost you your financial wellbeing.
Community Tax can also help prepare the necessary documentation required to prove your case to the IRS. By working with our resolution specialists, you’ll help ensure that your case is thoroughly presented to the IRS, and you’ll minimize your chances of paying out more than you should — including helping you with IRS negligence penalty abatement.
Tax Assurance
If you’ve had trouble with the IRS in the past, Community Tax can help you prevent any future delinquency through our Tax Assurance Program. After you resolve your tax debt, our professionals will help prepare, revise, and review all your tax documents to ensure you stay in good standing.
If you’re already in good standing, Community Tax’s “Tax Assurance Program” can help you stay there by providing expert assistance on all tax documents. Our tax assurance professionals can help you navigate new situations, too — like new investment earnings, a marriage, or recent additions to your family — to ensure you remain fully in compliance while also taking advantage of all the tax breaks available to you.
Whatever your tax situation, from yearly tax return preparation to debt resolution and contesting negligence penalties, Community Tax is here to help. Contact one of our experienced representatives today to find out more about how we can help you resolve your tax situation.
