IRS Penalties Defined

Thursday, August 11, 2011

On February 8, 2011, the Internal Revenue Service (IRS) announced an IRS amnesty program called 2011 Offshore Voluntary Disclosure Initiative (OVDI). The amnesty program is for taxpayers with unreported foreign financial accounts, entities, or income. The OVDI limits the potential penalties associated with the failure to disclose foreign accounts, assets, and foreign income. The 2011 OVDI limits taxpayers with undisclosed offshore accounts and assets exposure to civil penalties. Outside of the OVDI program, U.S. taxpayers discovered with unreported foreign bank accounts, unreported foreign income, and certain undisclosed foreign assets face the possibility of paying harsh penalties such as:

  1. A penalty for failing to report a foreign account which could be as high as the greater of $100,000 or 50 percent of the total balance of a foreign account in each year held
  2. A fraud penalty equal to 75 percent of an unpaid tax
  3. Penalties for the failure to file information returns.

Furthermore, individuals with undisclosed foreign income and accounts face the possibility of criminal prosecution. U.S. taxpayers that wish significantly limit their exposure to the above mentioned penalties must act fast. Taxpayers that wish to participate in the 2011 OVDI have until August 31, 2011 to complete all requirements of the program. Call us now for a free confidential analysis to gain information on how to remove the criminal element from your argument if you feel this applies to you. Deadline is August 31st!


IRS Penalties: The law imposes penalties to ensure that all taxpayers pay their taxes. Some of these penalties are discussed below. If you underpay your tax due to fraud, you may be subject to a civil fraud penalty. In certain cases, you may be subject to criminal prosecution.  Failure-to-file penalty. If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is 5% of the tax not paid by the due date for each month or part of a month that the return is late. This penalty cannot be more than 25% of your tax, but it is reduced by the failure-to-pay penalty (discussed next) for any month both penalties apply. However, if your return is more than 60 days late, the penalty will not be less than $100 or 100% of the tax balance, whichever is less. You will not have to pay the penalty if you can show reasonable cause for not filing on time.  Failure-to-pay penalty. You may have to pay a penalty of 1/2 of 1% of your unpaid taxes for each month or part of a month after the due date that the tax is not paid. This penalty cannot be more than 25% of your unpaid tax. You will not have to pay he penalty if you can show good reason for not paying the tax on time.  Penalty for frivolous return. You may have to pay a penalty of $500 if you file a return that does not include enough information to figure the correct tax or that shows an incorrect tax amount due to:

  1. A frivolous position on your part, or
  2. A desire to delay or interfere with the administration of federal income tax laws.

This penalty is in addition to any other penalty provided by law.  Accuracy-related penalty. An accuracy-related penalty of 20% applies to any underpayment due to:

  • Negligence or disregard of rules or regulations, or
            Substantial understatement of income tax. This penalty also applies to conditions not discussed here. Even though an underpayment was due to both negligence and substantial underpayment, the total accuracy-related penalty cannot exceed 20% of the underpayment. The penalty is not imposed if there is reasonable cause accompanied by good faith.  Fraud. If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax

Criminal Penalties  You may be subject to criminal prosecution (brought to trial) for actions such as:

  • Tax evasion,
  • Willful failure to file a return, supply information, or pay any tax due,
  • Fraud and false statements, or
  • Preparing and filing a fraudulent return.
Please call Strategic Tax Lawyers today at (800)NOW-IRS-LEVY for a free confidential analysis on where you stand, or if you feel you may be subject to the aforementioned penalties.