Penalty for Income Taxes

There are multiple income tax penalties that a State or federal taxation authority could potentially levy on a taxpayer and all of them will add substantially to the cost of debt tax originally due the taxation authority.

Common State Tax Penalties:

• Dishonored, bounced Check Penalty - A penalty of $30 or the amount of the payment, whichever is less will be levied for a bounced payment of tax debt to a State taxation authority. Reasonable cause to waive the penalty:  Reasonable belief that the check was good and would be paid.
• Dishonored Electronic Funds Payment Penalty - A penalty of $30 or the amount of the tax debt payment improperly submitted, whichever is less.
• Failure to File, Report or Pay Tax Penalty - A State Department of Revenue may impose a penalty up to $100 for each late or improperly filed return, document, or data transmission, and for each improper submitted tax debt payment.
• Late Filing Penalties - A penalty of 1% of the amount required to be shown as income tax on the late return for each month or fraction thereof during which such failure continues to exist not to exceed 25% percent will be added to the original income tax debt.
• Partnership Return Failure to File - A partnership will be levied with a penalty of $5 for every day in which it is in default for failing to file a tax return within the time allotted.
• Tax Preparer’s Penalty - The professional preparer of a return who is willfully a party to submitting a false or fraudulent return may be fined more than $100,000.00 or a sentence of 3 years in prison or both.

Common Federal Tax Penalties:

• Filing your tax return late - The late tax penalty is generally 5 percent each month, or partial month, and can be up to 25 percent of the amount due on your tax return.
• Paying your due tax late - The penalty for paying late is 0.5 percent per month, up to 25 percent of the unpaid amount that is due.
• Frivolous return penalty - A penalty of $500.00 may be applied if a taxpayer files a return that does not have enough information to even figure his tax or if the return shows an incorrect tax amount due to frivolous action by the taxpayer or an inherent desire to interfere with the federal taxation system in general.
• Accuracy-related penalty - A penalty of 20% applies to any underpayment due to taxpayer negligence in reporting or intentional disregard of taxation rules or regulations, or for substantial understatement of income tax.
• Substantial understatement of income tax penalty - A penalty 10% of the correct income tax or $5,000, whichever is larger, will be applied if a taxpayer has substantially understated his income tax.  The penalty may be reduced to the extent there is a reasonable basis for the under-reporting.
• Fraud in reporting - A penalty of 75% of the underpayment due to fraud will be added to the taxpayer tax debt due and criminal charges may also be filed.

It is only reasonable to try to avoid any situation that could lead to a tax audit or the IRS levying any penalty; that is best accomplished by having the assistance of a tax attorney before a penalty is levied and not after.  An experienced tax attorney can show a taxpayer how to avoid State and federal penalties, and if necessary, how to have successfully request an abatement from the taxation authority fully waiving the penalty.