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Tax Compliance - Penalties

Penalties
There are several reasons that the IRS might implement tax penalties, they include: late payment, underpayment of tax, fraud, late filing, exaggerated deductions and overvaluation of property, just to name a few.

After a tax audit, the IRS agent will discuss the results and proposed changes with you (if any).


If you agree with the assessment and changes:
You will be asked to sign Form 870 which permits an immediate assessment of your deficiencies, plus any interest and penalties due (if required).

If you disagree with the assessment and changes:
You may ask for an immediate meeting with a supervisor (if at an IRS office) to address your side of the dispute, or you can wait for a formal deficiency letter from the IRS and request an appeals conference to further debate the issue.

Interest and Penalties:

  1. Interest - You may be charged interest by the IRS if you underpay the taxes due, this interest rate is the federal short-term rate plus 3%. Interest begins to accrue from the due date of the return. Interest is charged on taxes due for returns filed after April 15, even if an extension was granted.
  2. Accuracy-related penalties - 20% of underpayment - includes excessive claim of refund, understatement of tax liability, overvaluing property basis, negligence and most other known misrepresentations and omissions.
  3. Failure to Pay penalties - 0.5% per month up to 25%
  4. Failure to File penalties - 5% per month up to 25%
  5. Fraud penalty - 15% per month up to 75% to any portion of the tax underpayment due to fraud
Sample Questions 1 - 6

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