Are you behind on your taxes? Worried about what's going to happen? Well, one of the first consequences is that the IRS will add penalties to your account. By addressing your tax debt as soon as possible, you'll be able to minimize penalties. If you've already incurred penalties, you may be able to apply for abatement. 

To help you out, this post looks at IRS civil penalties and how to navigate them. Below, we’ll go over exactly what to expect if you’re facing IRS penalties, how to avoid penalties in the future, and how our legal tax experts can help you resolve your current tax problems. To get help now, contact us at Seattle Legal Services today.

What are IRS Civil Penalties? 

Civil penalties are financial fines that are levied on your taxpayer account. Some penalties are a flat rate, but it’s much more common for a civil IRS penalty to be charged as a percentage of your overall tax burden on a monthly basis. Penalties are also subject to interest.

When Does the IRS Assess Civil Penalties?

The IRS has the authority to enforce tax collection efforts when a taxpayer is willingly avoiding filing or paying their fair share. Collection efforts include:

• Civil penalties
• Wage garnishment
• Tax liens and levies
• Filing a criminal warrant

The IRS always starts by adding penalties to your account. The penalties are supposed to deter people from breaking the tax code. If you continue to ignore your tax debt, the agency will resort to other collection tactics such as seizing your assets. 

Civil Penalties Vs. Criminal Tax Penalties

There is a major difference between civil and criminal law. Criminal law is designed to penalize people who break the law, which is why criminal tax penalties often include both monetary penalties and jail time. Civil law, on the other hand, was created to help ensure financial justice, which is why these penalties are always financial. You won’t go to jail over a civil penalty.

Despite this important distinction, it’s crucial to recognize that the IRS can issue a warrant for your arrest and charge you with a crime if you’re committing fraud or willfully avoiding your taxes. This type of enforcement effort is completely separate from civil penalties, though. Civil penalties will be the IRS’s first source of recourse. Criminal charges are usually a last resort, and taxpayers only face this type of enforcement effort in limited circumstances.

Common Civil Penalties You Should Know About

So, what are the IRS civil penalties that you need to be aware of, and how can you avoid being subject to these types of financial fees? Learn more about the most common civil penalties issued by the IRS, what they mean for your overall tax situation, and how to navigate each one below.

Failure-to-File Penalty

The IRS expects all taxpayers to remain informed about important tax dates. Everyone must file their individual income tax returns by April 15 every year. If that date falls on a weekend or another non-business day, then the next business day will be considered the official tax due date. There are a variety of other due dates for corporate, partnership, payroll and other federal tax returns. 

If you haven’t filed by the due date, then expect to receive a notification from the IRS.

Unfiled tax returns come with consequences, most notably the IRS failure-to-file civil penalty. This financial fine will charge you 5% of your overall unpaid tax burden for every month you don’t file. This fine will continue to increase to a maximum of 25% of your overall unpaid tax amount until you respond to the notice or file your return. 

For example, say that you owe $10,000 but you don’t file. The IRS will assess a $500 failure-to-file penalty on your account. However, the IRS doesn’t know how much you owe until you file. As a result, these penalties get added on retroactively once you file. Say you’re two months late, then the penalty will be $1,000 on a $10,000 tax bill. If you file five or more months late, however, you’ll incur the maximum 25% penalty.

Failure-to-Pay Penalty

Failure-to-pay penalties are levied against taxpayers with unpaid taxes. A civil pen form letter will outline the assessment of this fee on your account. This penalty is 0.5% of the total unpaid tax balance every month until your full balance is paid off. This penalty is capped at 25%.

This penalty increases to 1% per month after a certain period of delinquency. If you set up a payment plan, the IRS will continue to assess this penalty, but it will drop to 0.25% per month.

IRS civil penalties can also be stacked, which means you can face a failure-to-pay and a failure-to-file penalty at the same time. If both of these penalties max out, they can get up to 50% of your unpaid tax balance. 

Accuracy-Related Penalty

Another common type of civil penalty that the IRS can charge you with is an accuracy-related penalty. This type of fee is leveraged when you significantly underreport your taxable income to the IRS or falsely claim deductions that you really shouldn’t have been eligible to deduct. 

This type of error can happen as a result of negligence or a complete disregard of tax laws. It can also happen when the taxpayer substantially understates their overall tax liability. In these situations, the IRS will charge you 20% of the portion of the underpayment of tax that happened as a result of your accuracy misstep. Like other civil penalties leveraged by the IRS, you will need to pay interest on this financial fee.

Civil Tax Fraud Penalty

Sometimes significantly underreporting tax liabilities is an issue of negligence or disregard, but at other times it’s an issue of fraud. Civil tax fraud happens when a taxpayer intentionally seeks to evade an accurate assessment of their tax situation with the specific intent of avoiding paying their fair share of what they owe. Considering the intent behind fraud, it makes sense that the IRS civil fraud penalty is hefty.

The current civil tax fraud penalty is 75% of the underpayment due to fraudulent behavior.

Have you recently been hit with a civil tax fraud penalty? If so, then it might be a good time to consider your legal options. Often, when an IRS examiner finds evidence of fraud, they will refer the entire tax case to the IRS’s criminal investigation division. When that happens, there is an additional chance of facing criminal penalties, and you need a tax attorney to protect yourself.

Trust Fund Recovery Penalty

Employers who are in charge of their employee’s wages could get charged with a trust fund recovery penalty when they don’t successfully manage their worker’s tax situations. Every employer has a legal obligation to withhold a specific amount of each employee’s wages for FICA and federal income taxes. Then, the employer must submit these payments to the IRS. 

As you can imagine, improperly withholding an employee’s taxes or failing to withhold any at all adds up quickly. A trust fund recovery penalty is usually equal to the taxes that should’ve been rightfully withheld. For instance, if the employer should’ve withheld $5,000, then they’ll be on the hook to pay back the $5,000 in tax debt as well as an equal $5,000 trust fund recovery penalty.

This is one of the IRS’s worst penalties. It doesn’t just get assessed against businesses and their owners. It can be assessed against any individual who was responsible for withholding the tax but not paying it to the federal government. 

Underpayment of Estimated Tax Penalty

If you make estimated tax payments but don’t pay quite enough, then you can get charged with an underpayment of estimated tax penalty. This type of financial fee will apply even if you ultimately get a refund. The penalty will range based on the amount of the underpayment, the period when the underpayment was due, and the interest rate for the underpayment.

Dishonored Check Penalty

Have you ever written a check that later bounced? Have you ever attempted an electronic transaction that seemingly went through at the time only to cause problems later?

In these situations, you could get charged a dishonored payment penalty. A dishonored check penalty or a dishonored payment penalty will cost about 2% of the amount of the payment. If your payment was less than $1,250, then you’ll likely get charged $25 for the inconvenience.

Frivolous Tax Return Penalty

A frivolous tax return is submitted to the IRS but doesn’t include enough information to help the tax agency make a tax assessment, identify the taxpayer, or show the reported tax as incorrect. A frivolous tax return is submitted with the specific intent to delay or impede federal tax laws or tax assessments. If you submit a frivolous tax return, then you could face a significant penalty of up to $5,000.

Information Reporting Penalties

If you don’t file your information returns or provide your payee statements accurately to the IRS, then you could be subject to an information reporting civil penalty. This financial fine usually ranges from $60 to $310 depending on how late the return or payee statement is overall. You could face a fine of up to $630 for intentionally disregarding the submission of your returns.

How to Avoid Civil Tax Penalties

Civil tax penalties can quickly turn a minor tax issue into a major problem that requires significant effort, time, and money to resolve. In general, the best strategy for dealing with civil tax penalties is to work on avoiding them in the first place. Learn more about the best strategies for avoiding tax penalties and important tips for navigating taxes and tax penalties below.

Strategy One: File on Time

The best way to avoid a civil tax penalty is to ensure that you file your taxes on time. When you file your tax returns in a timely manner, you’re showing genuine respect for the IRS agency. If you do have a specific reason why you don’t think you’ll be able to file your returns on time, then you can always request an extension. Typically, a tax extension will provide you with plenty of time to get your taxes in order.

Strategy Two: Pay on Time

The second best way to avoid civil penalties is to pay off your taxes on time. If you’re able, then it’s best to pay off your full tax burden on tax day. You can also make estimated quarterly payments or pay on a different schedule, but it’s generally best to stay ahead of any tax deadlines.

If you fall behind, don’t assume that the IRS will look the other way. Consider looking into the tax agency’s payment plans if your tax debt is significant. While you may still face some civil penalties for not paying or falling behind, you could have these penalties reduced once you submit to a good payment plan.

Strategy Three: Keep Accurate Records

While filing on time and paying on time are both crucial, it’s also important to keep accurate records. Keeping good records could help prevent you from getting charged with civil tax fraud or facing a civil fraud penalty from the IRS. It can help serve as proof of your income, expenses, and more.

Strategy Four: Double Check for Errors on Your Return

Before you file your returns, do your due diligence and double-check for errors. A quick overview of your returns could save you from a whole host of problems with the IRS!

Important Tip: Honesty is the Best Policy

It can be very tempting to file for a few deductions that you don’t necessarily qualify for or possibly attempt to reduce your overall income to get you into a different tax bracket. Despite that, honesty is always the best policy, especially when it comes to the IRS. For the most part, the IRS already has a good idea of what you’ve actually earned, so lying or fibbing will only cause problems for you.

Important Tip: Consider Professional Help When Filing

Are you unsure about your next tax return? Are you interested in getting solid tax advice that you can rely on to make timely payments and returns? If so, then it might be a good idea to consider getting professional help with your next tax return. Depending on your situation, it might be best to consider talking with a tax resolution lawyer.

What to Do if You are Faced With a Civil Penalty

To reduce the risk of incurring more penalties, address your tax issue as soon as possible. Also, consider asking the IRS for a penalty waiver. The IRS offers first-time penalty abatement for taxpayers who are normally compliant with the tax laws— typically, this means that you haven’t incurred any other penalties in the last four years. The IRS also offers penalty waivers for reasonable cause, which refers to situations where you pay or file late due to deaths, illnesses, natural disasters, etc. 

If you’re facing a civil penalty, you likely have questions like — does a civil penalty go on your record? What should you do next? A civil penalty will go onto your tax account, but it won’t impact your credit score or other accounts unless you ignore the IRS’s attempts to resolve your situation. If you’re unsure what to do and facing a civil penalty, consider hiring a tax resolution lawyer who can help you with your next steps.

When to Seek Out Help for an IRS Civil Penalty

It’s best to seek out help with an IRS civil penalty if you’re not sure how to handle your situation. Sometimes, resolution is as simple as paying off what you owe. If you can’t afford your bill or need help potentially getting penalties removed from your account, it’s time to seek help.

Do You Need Help With an IRS Civil Penalty or Other Tax Issues?

If you already owe the IRS or have owed them for a while, facing an IRS civil penalty might not seem like that big of an issue. Over time, however, that minor penalty could cause your minor tax debt to balloon into a massive, overwhelming problem. Instead of letting your tax issues spiral out of control, consider hiring a tax professional who can work with you to devise a straightforward path toward tax resolution.

Here at Seattle Legal Services, our tax resolution professionals can help you navigate civil penalties and other tax problems. Schedule a consultation with our office now to get in touch and start resolving your tax problems for good.