TOP DRAWER ARTICLE

Tax Penalties, Part I
by
HL Carpenter

You’re late. You’re late for a very important date: Meeting your personal tax obligation to the Internal Revenue Service. Now it’s the hour of reckoning. How much is it going to cost you?

Here are five violations and the related charges:

1. Noncompliance - You owe taxes and failed to file a return or you filed the return after the due date.

   Cost to you – Five percent per month of the tax due up to a maximum of 25%, if the failure is not related to fraud. When your return is 60 days late (or more), the minimum penalty is the lesser of $100 or 100% of the tax due.

   Exception – You may be able to get the penalty reduced if you can show reasonable cause.

2. Noncompliance - Failure to report tips to your employer.

   Cost to you - 50% of the Social Security tax due on the unreported tips.

   Exception - None.

3. Noncompliance - Underpayment of your personal estimated tax payments.

   Cost to you – Interest is charged on the underpayment until the delinquent amount is paid.

   Exception - Penalty is generally mandatory, but may be waived in some situations (casualty, disaster or other unusual circumstances).

4. Noncompliance - Paying your taxes with a bad check.

   Cost to you - Two percent of the amount of your payment. If the amount due is less than $750, the penalty is $15 or the payment amount, whichever is less.

   Exception - You may be able to get the penalty reduced if you can show reasonable cause.

5. Noncompliance – You filed a frivolous or incomplete return.

   Cost to you - $500 civil penalty.

   Exception – None. If you’re seeking judicial review of the penalty, you must first pay the entire penalty and file a claim for refund. After the IRS sends you a Letter of Disallowance, you can file suit in the district court or the US Court of Federal Claims.

Originally published November 2007.

Last update: December 30, 2009