Tax Penalties to Persons, Partnerships, and Corporations
If a person, partnership, or corporation is selected for an IRS audit, there are a range of financial and criminal penalties that may be imposed. But there are solutions, such as making an offer in compromise, applying for reduction or abatement and an option to appeal.
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Most Common IRS Penalties
Failure to File: 5% per month to a 25% maximum. After sixty days the minimum IRS penalty is the lesser of $135 or 100% of tax due.
Failure to Pay: 0.5% per month, not exceeding 25% in aggregate.
Accuracy-Related: 20% to 40% of the underpayment.
Fraud: 75% of the underpayment attributed to fraud.
USC General Fraud Penalties
If a person, partnership, or corporation is fraudulently non-compliant with tax reporting there may also be serious US Code consequences that can include a jail term, fine (or both) plus costs.
Attempt to Evade or Defeat Tax
Maximum prison sentence of five years or $250,000 ($500,000 penalty for corporations) or both, plus prosecution costs.
Willful Failure to File a Return, Supply Information, or Pay
Maximum prison sentence of 1 year or $100,000 ($200,000 for corporations) or both, plus prosecution costs.
Fraud and False Statements
Maximum prison sentence of 3 years or a $250,000 ($500,000 for corporations) or both, plus prosecution costs.
Since the introduction of OVDP (Offshore Voluntary Disclosure Program) and OVDI (Offshore Voluntary Disclosure Initiative) the IRS has pursued the strict application of penalties for non-disclosing. To date they have been reluctant to collect on those who withdraw from OVPD/OVDI, and taxpayers who are denied entry, but, consulting a tax attorney is recommended.
The 2014 OVDP Program carries a 27.5% penalty on undisclosed assets, or 50% penalty if your bank is on a “bad bank” list by the IRS.
The “Streamlined” OVDP program has a penalty of 5% of the maximum aggregate bank account balance during the disclosure years.
For both of these programs, these penalties are only applicable if the taxpayer begins the program before examination or audit. If the taxpayer is audited and found to have undisclosed foreign assets or bank accounts, the penalties are severe! For undisclosed bank accounts, the typical penalty is $10,000 per year per account.
There is a word of caution to partners and partnerships. The 2015 Bipartisan Budget Act can affect partnerships starting in the 2018 tax year. Partnership tax deficiencies will then be assessed at the partnership level.
Liabilities for any penalties will be determined also at the partnership level, rather than with each partner, as was previously the case. Unless the partnership elects to pass the adjustments through to its partners, the partnership itself is liable for any penalties.
The implementation of this new act may require diligent planning with the help of a tax attorney, prior to the 2018 Tax year.
Taxpayers have a right to challenge IRS decisions in court. A tax attorney can help in understanding maximum penalties and reliefs available such as filing an offer in compromise, reduction or abatement and the option to appeal decisions from those applications.
Gordon Law Group represents many of our clients in Penalty Abatement requests, appeals and in the United States Tax Court.