IRS Civil Tax Penalties
What Are Civil Penalties & How to Remove
Taxpayer’s Guide to Dealing With IRS Civil Penalties
How Much Are IRS Penalties? And How Do You Get Them Removed?
If you don’t follow the IRS’s rules, the agency can slap you with a civil penalty. The IRS assesses penalties if you don’t file, pay late, provide false information, or take other actions that violate the Internal Revenue Code. There are over 140 different civil penalties, and they can significantly increase your tax bill if you don’t take care of them.
Once the IRS assesses a penalty, interest starts to accrue on it, causing your balance due to grow even faster. To protect yourself, you need to take action as soon as possible. To get help now, contact us at the W Tax Group. We will leverage our extensive experience with tax resolution to help you get the best outcome possible for your situation.
In the meantime, here is a guide to IRS civil penalties. It also includes tips on how to avoid penalties and links to resources with more information.
Individual Income Tax Return Penalties
You can incur the following penalties related to your individual income tax returns:
- Failure to File Penalty — 5% of your balance due if you file late, assessed monthly, and can get up to 25% of your balance.
- Failure to Pay Penalty — Also called the late payment penalty, 0.5% of your balance due if you pay late, assessed monthly, and can get up to 25% of your balance.
- Penalty for Underpaying Estimated Tax — Applied if you don’t pay your estimated quarterly tax payments in full and on time.
- Frivolous Tax Returns — Civil penalty of $5,000 if you file a frivolous tax return.
- FBAR Penalties — If you fail to report foreign bank accounts as required by the IRS, the civil penalty can be up to $10,000 per form. This penalty is indexed for inflation, and as of 2023, it is $15,611.
- Form 8938 Penalties — If you don’t report certain specified foreign assets on Form 8938 with your personal income tax return, the IRS may assess a civil penalty of $10,000.
The FBAR and Form 8938 requirements fall under the Foreign Account Tax Compliance Act (FACTA), and if the IRS assesses criminal penalties for violating these laws, they can get up to $500,000 and/or include ten years imprisonment.
Civil Penalties Related to IRS Tax Collections
If you file or pay late, the IRS will apply monetary penalties to your account, but if the agency has to pursue involuntary collections, it will assess even more penalties against you to cover the collection costs. In particular, if the IRS seizes your property, it will add the cost of the seizure and auction to your tax bill. The proceeds of the sale will first cover the cost of the sale, and then, any remaining amount will be applied to your tax bill.
Additionally, if you file a frivolous submission during the tax collection process, the IRS can assess a $5,000 specified frivolous submission penalty. This penalty applies if you file paperwork that contains frivolous requests designed to impede or delay tax collections or administration of the laws. For instance, if you submit a frivolous appeal to a tax lien or request an offer in compromise (or other type of relief) based on frivolous arguments.
If you send a payment and the check bounces, you will incur a dishonored check penalty of 2% of the amount of the check. It is at $25 for checks between $1,250 and $25, and it’s 100% of the check amount for checks worth less than $25.
Business Civil Tax Penalties
If you file or pay corporate taxes late, the penalty is the same as for personal income tax returns. It is 5% of the tax liability for late filing and 0.5% of the tax liability for late payments. These penalties apply monthly, and they can stack up to 50% of the tax due.
Your business may also incur these penalties if you don’t file or deposit payroll taxes on time:
- Failure to Deposit Payroll Tax Penalties — 2 to 10% of the payroll tax that was deposited late. Gets up to 15% of the tax if not paid within 10 days of receiving an IRS notice.
- Trust Fund Recovery Penalty — Up to 100% of the unpaid trust fund taxes (taxes withheld from your employees’ paychecks) and can be assessed against many different people in the business.
As of 2024, the penalties for failure to file information returns or provide payee statements are as follows. For example, you may be assessed these penalties if you don’t file a W3 or fail to provide W2 statements to your employees:
- $60 per return if you are up to 30 days late, maximum penalty of $630,500 per year ($220,500 for small businesses with $5 million or less in average annual gross receipts over the last three years).
- $120 per return if you file between 31 days late and August 1, with a maximum penalty of up to $1,891,500 per year ($630,500 for small businesses)
- $310 if not filed or filed after August 1, with a maximum of $3.783 million ($1.261 million for small businesses)
- $630 per return for intentional disregard, with no maximum. Large employers also face these penalties if they don’t provide their employees with 1095-C forms showing offers of health insurance, or if they don’t file these forms with the IRS along with Form 1094-C. Learn more about reporting compliance with the Affordable Care Act.
Audit Penalties
If the IRS audits your tax return, the agency will likely assess civil penalties against you if the auditor finds significant mistakes on your tax return. IRS audit penalties include the following:
- Accuracy-related penalty — 20% of the unreported tax liability if you intentionally disregarded the laws, substantially understated your income, or were negligent when preparing your tax return.
- Civil tax fraud — 75% of the unreported tax if you committed fraud when filling out your tax return.
- Fraudulent failure to file penalty — 15% of the tax liability for every month the return was filed late if the auditor decides that you filed late due to intent to commit tax fraud.
Most audit penalties are civil penalties. However, in extreme cases, the IRS may decide to recommend criminal charges. Criminal penalties can be up to $25,000 for fraudulent failure to file, up to $25,000 for criminal failure to pay estimated tax, and up to $100,000 for filing a fraudulent tax return.
Civil Vs. Criminal Tax Penalties
Civil penalties are assessed when you break the IRS’s rules. Criminal penalties apply when you break the law, and the IRS recommends legal prosecution. While civil penalties are very common, criminal penalties and charges tend to be relatively rare.
How to Avoid Civil Tax Penalties
To avoid civil tax penalties, ensure that you understand the tax code. This is particularly important if you’re starting a business, as the tax requirements are a lot more intense and multi-layered for business owners. Keep these tips in mind if you want to avoid penalties:
- Know the due dates and file on time.
- Pay your tax bill on time.
- If you can’t afford to pay, then file and contact the IRS to make arrangements on the unpaid amount as soon as possible.
- Pay your estimated taxes on time.
- Use 1040-ES to calculate your quarterly tax if your income fluctuates during the year.
- Keep accurate records.
- File accurate tax returns.
- Consider working with a tax professional, especially if you own a business.
- Double-check your tax return whether you complete it on your own or hire a tax preparer.
Unfortunately, ignorance of the tax code is not an excuse for failure to follow the rules, and the IRS can assess penalties even if you just feel like you made a mistake. Luckily, however, the agency is often willing to remove penalties for first-time issues as long as you have a history of tax compliance.
Additionally, if you’re worried about incurring penalties due to failure to file a certain return, you may be able to take advantage of the IRS’s voluntary Disclosure Program. There is a pathway for both criminal and civil disclosure. In all cases, you should talk with a tax attorney before taking either of these steps.
How to Remove Civil Penalties
If you incur a civil penalty, call the IRS and ask for abatement. The IRS offers penalty abatement in situations where you had reasonable cause to incur the penalty (for example, filing late due to a forest fire) or if you’ve incurred a first-time penalty. You can also request relief by filing Form 843.
However, you need to be strategic when requesting penalty removal. For example, imagine that you’re incurring failure to pay penalties, and you call the IRS after six months and request abatement, but you don’t pay the tax bill for another three months. In this case, you will still incur penalties for the additional three months. If you had waited to request abatement until after you paid, you might have been able to get the IRS to remove all of the penalties.
When you’re dealing with very high penalties, such as penalties assessed against a high personal or corporate tax liability or penalties related to foreign bank account disclosures, you should seek professional help. A tax attorney can help you contest the penalties, seek abatement, or take other steps to reduce your balance and get you out of tax debt.
Get Help With IRS Civil Penalties Today
To get help with IRS or state tax penalties, contact us today. At the W Tax Group, we focus on helping people with tax problems, and we invite you to contact us for a free consultation to talk about your concerns.
