Taxpayers in the United States may face various penalties for failures related to Federal, state, and local tax matters. The Internal Revenue Service (IRS) is primarily responsible for initiating these penalties at the Federal level. The IRS can assert only those penalties specified imposed under Federal tax law. State and local rules vary widely, are administered by state and local authorities, and are not discussed herein. Penalties may be monetary or may involve forfeiture of property. Criminal penalties may include jail time, but are imposed only by a federal judge after a defendant is tried and conviction. Most monetary penalties are based on the amount of tax not properly paid. Penalties may increase with the period of nonpayment. Some penalties are fixed dollar amounts or fixed percentages of some measure required to be reported. Excise taxes used as penalties are imposed in the Code sections relating to particular kinds of transactions. Some penalties may be waived or abated where the taxpayer shows reasonable cause for the failure. Penalties apply for failures to file income tax or information returns or filing incorrect returns. Some penalties may be very minor. Penalties apply for certain types of errors on tax returns, and may be substantial. Some penalties are imposed as excise taxes on particular transactions. Certain other penalties apply for other types of failures. Certain acts may result in forfeiture of property of the taxpayer. There are over 150 kinds of civil penalties in the U.S. Internal Revenue Code, ranging in severity which is reflected in the amount of the applicable fines.
Underestimate and late payment penalties
Taxpayers are required to have withholding of tax or make quarterly estimated tax payments before the end of the tax year. Since accurate estimation requires accurate prediction of the future, taxpayers may underestimate the amount due. The penalty for paying too little estimated tax or having too little tax withheld is computed like interest on the amount that should have been but was not paid. Where a taxpayer has filed an income or excise tax return that shows a balance due but does not pay that balance by the due date of the return (without extensions), a different charge applies. This charge has two components: an interest charge, computed as described above, and second a penalty of 0.5% per month applied to the unpaid balance of tax and interest. The 0.5% penalty is capped at 25% of the total unpaid tax. The underestimate penalty and interest on late payment are automatically assessed. No "reasonable cause" exception is available for avoiding these penalties.
Penalties for failure to timely file returns or timely pay tax Penalty for Failure to Timely File Return: If a taxpayer is required to file an income or excise tax return and fails to timely do so, a late filing penalty may be assessed. The penalty is 5% of the amount of unpaid tax per month the return is late, up to a maximum of 25%. A minimum penalty of $135 may apply for late filing of an income tax return. Penalty for Failure to Timely Pay Tax: If a taxpayer is required to pay an amount shown on his return, but the taxpayer fails to pay such amount (even if the reason of nonpayment is a bounced check), there is a penalty of 0.5% of the amount of unpaid tax per month the return is late up to a maximum of 25%. Penalty for Failure to Timely Pay After Issuance of Notice: If a taxpayer fails to pay a tax or other amount required to be shown on a return and the amount is not shown on the return, the taxpayer may be liable for a penalty equal to 0.5 percent per month of such amount, for each month during which the failure continues, if the amount is not paid within 21 calendar days after the date of an IRS notice demanding the payment. If both the failure to file and the failure to pay penalties apply during the same month, then the failure to file penalty is reduced by 0.5% each month. The...
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