IRS penalties

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IRS penalties, as set out in the Internal Revenue Code, are imposed to "enhance voluntary compliance."^[1] There are over one hundred-forty separate IRS penalty provisions.^[2] Common IRS civil law penalties include the penalty for filing a fraudulent return, the accuracy related penalties, the penalty for failure to timely file a return, the penalty for failure to timely pay a tax, and the frivolous return penalties.

The fraudulent return penalty is set out in IRC Section 6663.^[3] This penalty is "75% of the portion of the underpayment [of tax] which is attributable to fraud." The fraudulent failure to file return penalty is set out in IRC Section 6651(f). This penalty also has a maximum 75% rate.

The accuracy-related penalty is set out in IRC Section 6662.^[4] This penalty is 20% of the amount of the portion of the understatement of tax attributable to the conduct being penalized. Accuracy penalties include the "negligence or disregard of rules or regulations" penalty, the "substantial understatement of income tax" penalty, the penalty for "substantial valuation misstatement," the penalty for "substantial overstatement of pension liabilities," and the penalty for substantial valuation misstatement in connection with gift tax or estate tax.

The penalty for failure to timely file a return is set out in IRC Section 6651(a).^[5] This penalty is equal to 5% of the amount required to be shown on the return, per month up to a max of 25% of the amount required to be shown on the return. If the return is filed more than 60 days after the due date, the minimum penalty is the lesser of $100 or 100% of the tax required to be shown on the return.

The penalty for failure to timely pay a tax is set out in IRC Section 6651(a)(2) & (3).^[6] This penalty is equal to 0.5% per month, up to 25% of the amount shown as due on a return.

The penalty for failure to timely pay estimated is set out in IRC Section 6654 & 6655.^[7] The penalty is based on the general underpayment interest rate under IRC Section 6621 calculated on the installment amount based on the "required annual payment" from the date that the estimated installment is due to the earlier of the date the tax is paid or the original due date of the return.

The frivolous return penalty is set out in IRC Section 6702.^[8] This penalty imposes a $500 fine for filing a frivolous income tax return. The penalty applies to an individual who files a return of tax on behalf of a tax shelter.^[9]

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