In order to encourage taxpayers to file their income tax returns or business tax returns and pay their taxes on time, the Internal Revenue Code (Tax Code) provides for penalties. A tax penalty is usually assessed for failure to file tax returns on time or altogether (unfiled tax returns). Similarly, a tax penalty is imposed for failure to timely pay taxes. These are called “failure to file penalty” or “failure to pay penalty”.
The IRS also penalizes taxpayers for inaccurately reporting their income (sometimes called IRS penalties for underpayment or understatement of income tax) and for committing tax fraud. The amount of the IRS tax penalty depends on the reason for, and the amount of, tax liability or tax underpayment.
IRS penalties for tax fraud are higher than those for negligence in paying or filing for taxes. For example, a tax audit may uncover evidence of delinquent tax returns, unreported or underreporting of income and failure to collect or remit payroll and employment taxes. These may qualify as criminal tax offenses and could lead to criminal investigation and criminal prosecution of the offender for tax evasion.
Similar to interest on late taxes, civil penalties for unpaid tax obligations accrue the longer the tax debts go unpaid. In some cases, the amount of the combined penalties and interest for delinquent tax liabilities exceeds the unpaid tax itself.
In order to reduce or eliminate tax underpayment penalties, the IRS or a state taxing authority should be convinced that the assessment of the tax or of the penalty was unfounded. The taxpayer must present the government with specific reasons as to why a particular income tax or business tax liability or penalty should be decreased, removed or abated altogether. The best results are achieved when the taxpayer points to a specific provision in the Tax Code or to similar facts in case law where a court found that assessed taxes or penalties should be reduced or eliminated.
The IRS frequently resorts to tax liens and tax levies for collection of tax debts or back taxes which frequently include interest and penalty. If you have recently received a tax bill including penalties and interest, or a notice of intent to lien or levy, contact Kamyar Mehdiyoun, tax relief attorney in Rockville, Maryland. We are a tax law firm specializing in tax controversy. Abatement of tax, penalty and interest is best achieved by early intervention of experienced tax counsel. We have been successful in reducing or eliminating hundreds of thousands of dollars in tax liabilities, penalties and interest.