If you file an incorrect tax return, the IRS will not assess a penalty if it owes you a refund. You can even claim your refund late by filing an amended tax return within three years. If you owe the IRS money and you fail to pay because of inaccuracies on your tax return, however, the IRS may assess penalties and interest.
Late Payment Penalties
If inaccurate information on your tax return causes you to underpay your taxes, the IRS will assess a late payment penalty of 0.5 percent of the overdue amount for every month that your payment is late. For penalty purposes, any part of a month counts as a full month -- one month plus one day late is counted as two months late. The maximum penalty, however, is 25 percent of the amount overdue.
Negligence penalties apply if you make an especially careless error on your tax return, if you recklessly disregard tax rules, or if you substantially understate your tax liability. Understating your tax liability without further evidence of negligence will trigger the negligence penalty only if it exceeds $5,000 or 10 percent of the total amount you owe, whichever is greater. This penalty amounts to 20 percent of the overdue amount, and can be added to any other penalties that may apply.
Civil Fraud Penalties
Civil fraud penalties apply if you intentionally attempt to deceive the IRS. If it finds fraud, the IRS can fine you 75% of the amount of whatever underpayment that was due to fraud, in addition to any other penalties that may apply. Fraud normally involves a false statement or an attempt to conceal critical information. You can commit fraud, for example, by failing to report income from abroad because you thought the IRS would never discover it.
The IRS charges an interest rate for overdue taxes that is reassessed every quarter. For example, for the second quarter of 2012, the rate was 3 percent above the federal short-term interest rate. Interest is compounded daily, and there is no maximum cumulative interest charge.
Like civil fraud, tax evasion requires a deliberate attempt at deception. Civil fraud can also be prosecuted as tax evasion. If you deliberately overstate your deductions, for example, you might be prosecuted for tax evasion. The maximum penalty for tax evasion is five years in federal prison and a $250,000 fine.
If you file jointly with your spouse and your spouse makes an error on your tax return, you are jointly liable with your spouse for any resulting tax underpayment. Joint liability means the IRS can come after you alone, your spouse alone, or both of you for your combined overdue tax liability. Under certain circumstances, however, the IRS may grant you relief under the tax code's "innocent spouse" provisions.
- Internal Revenue Service: Failure To File/Failure To Pay Penalties
- Internal Revenue Service: Return Related Penalties
- LawFirms.com: Criminal Tax Evasion
- Internal Revenue Service: - IRS Notices and Bills, Penalties and Interest Charges
- Nolo: Negligence Versus Tax Fraud: How Can the IRS Tell the Difference?
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.