Tax Penalties: What Are They?

Negligence can always cause distress, but it will also cost you money when it comes to taxes. The Internal Revenue Service can hit you with an additional interest charge the moment they find out that you carelessly filed your tax return resulting in an underpayment of taxes.

To date, tax penalties are a reliable source of revenue for the federal government. In light of that consistent source of revenue, the federal government has invested in collection processes to collect tax penalties that leave some debtors at the mercy of the Internal Revenue Service.  However, if you owe tax penalties, rest assured that an experienced tax attorney can help you avoid those penalties and mitigate your tax liabilities.

Types of Tax Penalties

Here’s an overview of the classifications of IRS penalties:

  • Accuracy penalties. Do not try to understate your tax liability because once the IRS finds out that your tax return is misstated, they can impose an accuracy-related penalty that is equal to 20 percent of the net tax understatement. This type of penalty can either be due  to “substantial understatement” or “negligence or disregard of the rules or regulations.”

Warning – Accuracy related penalties (also called 6662a penalties after the relevant section of the Internal Revenue Code) can lead to substantial cost, especially in the cannabis industry. Tax courts have been quick to assess the 6662a penalty against cannabis dispensaries who’ve challenged the IRS in 280E litigation following applicable case law. Before making an aggressive tax strategy against conservative interpretations of tax state and case law, consult with a tax attorney. Especially for marijuana dispensaries, a cannabis taxation lawyer can help the business create a tax strategy that minimizes the risk of costly 6662a penalties.

  • Fraud penalties. If you are thinking of underreporting your income, well, think again. If the IRS checks your record and discovers that you fraudulently omitted your earnings, they can give you a penalty of up to 75 percent of the amount you did not report. 

The IRS says ignorance of the law does not constitute fraud. But once they find strong evidence of fraud, the case will be referred to the IRS Criminal Investigation Division for potential criminal prosecution.

  • Failure to pay employees’ taxes. If you are an employer who failed to withhold or deposit your workers’ social security, medicare, and income taxes on time, you can get in trouble with the IRS as well. This occurs when employers file IRS Form 941 late, and the penalty usually depends on how long it took them to settle the payments.
  • Failure to file information returns. This one still goes to employers but specifically to those who did not file Form 1099 that shows the payments made to service providers, such as contractors. The penalty will vary depending on the type of form they failed to file.
  • Failure to pay penalties. Time is of the essence when paying taxes, so in case you miss the deadline, the IRS can impose a penalty of 0.25 percent to 1 percent per month of the total amount you did not pay on time. The penalty will start at 0.50 percent per month, but if you agreed to be under an installment agreement, the IRS can drop it to 0.25 percent per month.
  • Late-filing penalties. Filing your tax return late and not requesting an extension can cost a 5-percent penalty per month, up to 25 percent of the total charge. The maximum of this penalty is reached when five months and one day after the April 15 deadline, you still did not file your tax return.

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