If you do not meet your tax obligations in their entirety, the federal government maintains the ability to assess civil and criminal penalties to you. Here are the answers to some of the most common questions that I hear regarding civil penalties:
Why does the IRS assess penalties?
According to the IRS, penalties are primarily assessed to encourage you to obey the tax laws.
What are the most common penalties?
There are approximately 150 different penalties that the IRS can assess. Penalties come in all shapes and sizes. If you do not file your tax return or pay the associated tax in a timely manner, you may be subject to the penalties for failure to file, late payment of tax, and for failure to make estimated tax payments. The penalty for failure to file is typically the largest of these three penalties.
If your business does not properly make federal tax deposits, it may be subject to the federal tax deposit penalty.
If the IRS believes that your tax return does not reflect honest and accurate information, you may be subject to an accuracy related penalty. If the IRS believes that you intended to evade taxation or defeat the tax, you may be subject to the civil fraud penalty which is a whopping 75% of your underpayment amount!
Does the IRS ever make mistakes regarding penalties?
Yes. As you can imagine, the IRS is not infallible and does make mistakes at times. I have seen instances where the IRS inappropriately assesses penalties against taxpayers and where the IRS miscalculates the amount of the penalties.
What should I do if I do not agree with a penalty that was assessed?
- Determine whether the IRS has the legal authority to assess the penalty against you;
- Determine whether the amount of the penalty is accurate; and
- Request that the IRS remove the penalty, if appropriate.
Will the IRS consider removing or reducing penalties?
Yes. The IRS may consider removing or reducing penalties after they have been assessed, based upon your circumstances.
What is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty is not a penalty in the traditional sense. In short, the Trust Fund Recovery Penalty is the portion of a business’ unpaid employment taxes that is assessed against a “responsible person.” A responsible person is an individual who is required to collect, account for and pay over the employment taxes. Whether you are a responsible person depends upon your involvement with the business at time of issue.
If you are involved with a business that has unfiled employment tax returns or has unpaid employment taxes, the IRS may consider assessing the Trust Fund Recovery Penalty against you personally.