Tax Penalties in Federal Taxation
Taxation is the lifeblood of government since it the source of which all its activities are realized. Taxation also involves a symbiotic relationship between the state and the citizens that belongs to it. The government would provide protection and welfare services to the inhabitants of the state and these inhabitants would in turn pay taxes to the government. In connection, the power of the government to collect taxes from the people is an inherent attribute of sovereignty. The citizens were given numerous benefits due to the taxes that they paid to the treasury of the government. On the other hand, the collection of taxes by the government is continued in order to continue existing. Besides, taxation is the most pervasive obligation of the citizens. It becomes demandable from the birth of the person even up to its grave in accordance with the law. Since taxation is intimately related to the police power of the state, it tends to affect the private property of persons when necessary. Hence, the inability of paying taxes includes tax penalties as a form of enforcement of an inherent power of the government.
The Federal Tax System of the United States also includes interest, fines, and penalties in order to promote and effective and efficient collection of taxes. The fundamental concept is that the people must pay taxes to the government in exchange of the protection and social welfare benefits that they receive from the government. The government had the inherent right to imposes interest, fines and penalties in relation to non-payment of taxes. The taxes accrued to a taxpayer must be paid on time and inability to pay the same upon due date incurs interest, fines and penalties. The regulation is very important for the enforcement and proper collection of many forms of taxes in the government. The Federal taxes law administered by the Internal Revenue Service includes provisions on penalties which added the payment of fines and for civil and criminal fines and penalties (Crockett, 1955, p. 129). In the Federal taxes, the law implements penalty in order to ensure that the people are paying their taxes. The penalties for non-payment of taxes may include civil or criminal liabilities. That is why an individual may be found to pay fines due to non-payment of taxes or suffer criminal sanctions.
Tax Penalties in Federal Taxation
The Internal Review Service penalties are enforced for the proper and efficient collection of taxes. There are many kinds of tax penalties in Federal taxation. These are failure-to-file penalty, failure to-pay penalty, penalty for frivolous return, accuracy-related penalty, negligence, and disregard, substantial understatement of income tax, information reporting penalties, and failure to furnish correct payee statements, identification numbers and other information, civil penalties, filing late, fraud, return over 60 days late and its exception, paying tax late, combined penalties, accuracy-related penalty, negligence or disregard, adequate disclosure, substantial understatement of income tax, substantial authority, disclosure statement, frivolous return, underpayment due to fraud, joint return, failure to supply social security number, failure to submit tax shelter registration number, and criminal penalties which include tax evasion, willful failure to file a return, fraud and false statements or preparing and filing a fraudulent return (IRS Tax Attorney Website, 2009, p. 1).
There are rules to follow with respect to filing income tax returns in order to avoid penalties. A person who does not file an income tax return during due date which includes extensions must pay a failure-to-pay penalty. Before, the rule is that the penalty of 5% of the tax not paid by the due date for each month or part of a month must be paid because the said income tax return is already late. The said penalty must not be more than 25% of a person’s tax. Nevertheless, if a person’s return is late for more than 60 days; the penalty will not be less than $100 or 100% of the tax balance, whichever is less. Showing reasonable cause for failure to pay taxes on time is allowed. However, the current rule was changed. For income tax returns mandatory to be filed after 2008, the failure-to-file penalty for returns filed more than 60 days after the due date which includes extensions is augmented. In this situation, the bare minimum consequence is the lesser of $135 or 100% of the unpaid tax (Internal Revenue Service, 2008, p. 1).
The government encouraged the people by means of implementing the failure-to-pay tax penalty. These penalties must be charged on tax accounts with unpaid taxes when it becomes due. There is one unique difference of failure-to-pay tax penalties compared to other tax penalties. The failure-to-pay tax penalty continues to accumulate as time progresses since other penalties are just assessed once (Government Treasury Website, 2005, p. 1). The failure-to-pay tax penalty normally grows at a charge of one-half of 1 percent each month on the due tax that is not paid and continues to accumulate until the penalty reached a ceiling of 25 percent (Government Treasury Website, 2005, p. 1). In connection, the said penalty is charged only on the unpaid tax which excludes unpaid penalties and interest (Government Treasury Website, 2005, p. 1). At present, the administration of the failure-to-pay tax penalty is mostly done by calculations and assessments which are made by the IRS computer system (Government Treasury Website, 2005, p. 1). The computer transforms an original evaluation of the penalty in the account of the taxpayer on the IRS’ Master File when new tax liability is assessed. After the said process, the penalty continues to grow per month but is not assessed to the account of the taxpayer until all other assessed liabilities such as tax, penalties, and interest that have actually been posted to the account are fully paid and there is an available credit in the account of the taxpayer. That means, the computer continues to track the number of failure-to-pay tax penalty of which the taxpayer needs to pay but there is no official assessment on the taxpayer unless there is enough funding in the taxpayer’s account to cover the payment of the penalty. In other words, only the portion of the accumulated failure-to-pay penalty that can be officially-assessed and can be paid through the credit available in the account of the taxpayer. The rest of the accrued payments remain accumulated but not assessed.
Penalty for Frivolous Return
This penalty is added to other tax penalty imposed by law. The civil penalty of $500 shall be collected from taxpayers who submitted a frivolous tax return (ITRL Iowa Website, 2008, p. 1). A frivolous return is an income tax return which is lacks enough data and a return which was submitted with the intention of obstructing implementation of tax laws (ITRL Iowa Website, 2008, p. 1). If the frivolous tax return is found to be relevant, the penalty is still imposed despite lack of tax liability on the return. The frivolous return penalty is similar to the penalty imposed for frivolous income tax returns found in the provisions of Section 6702 of the Internal Revenue Code (ITRL Iowa Website, 2008, p. 1). The penalty can also be imposed despite that the return subject to penalty is just an amended return.
The Accuracy-Related Penalty
The accuracy-related penalty is related to negligence because it focuses more on giving penalty for thoughtless submission of tax return which defies accuracy. The rule provides that an accuracy-related penalty amounting to 20% should be imposed due to underpayment for negligence or disregard of rules or regulations and substantial understatement of income tax (IRS Tax Attorney Website, 2009, p. 1). Despite the fact that underpayment happened because of taxpayer’s negligence and substantial underpayment, there should be no excess to 20% of the underpayment. However, the accuracy-related penalty cannot be imposed upon an erring taxpayer if he is able to present reasonable cause with good faith. On the other hand, negligence in filing income tax return simply means failure to follow the rules found in the provisions of the Internal Revenue Code. There is a need to avoid this penalty. The amount of the negligence penalty is 5% or more of the tax that had been underpaid (Hurley, 2003, p. 1). As explained, the penalty is imposed after the government has audited a taxpayer’s return and has determined any underpayment of taxes. Disregard is also part of negligence in paying taxes since it involves thoughtless and reckless disregard of the provisions of the law.
Substantial Understatement of Income Tax
The substantial underpayment penalty applies when a taxpayer underpays his taxes by more than 10% of tax bill amounting to $5, 000.00, whichever is higher (Hurley, 2003, p. 1). With respect to the amount of the substantial underpayment penalty, it is composed of 25% of the amount attributable to the underpayment. In order to avoid these huge penalties, there is a need to prove that a taxpayer has considerable weight to rely on a specific position that he acknowledged in his income tax return. In addition, the taxpayer may also prove that he disclosed all the circumstances and information related to issues upon filing of the tax return. If the taxpayer was able to present a reasonable cause why he committed understatement of income tax, the law might bend in his favor. Hence, providing acceptable and valid reasons is necessary.
Information Reporting Penalties
Information reporting penalties are imposed upon persons or taxpayers who deliberately choose not to file information return or a comprehensive and exact information return with the Internal Revenue Service during the given period to do the same including extensions (IRS Tax Attorney Website, 2009, p. 1). The said act is subject to tax civil penalties. A penalty applies to information returns as an accurate information returns filed within 30 days subsequent to the due date, $15 each, correct information returns filed subsequent to the 30-day period but by August 1, $30 each, and information returns not filed by August 1, $50 each (IRS Tax Attorney Website, 2009, p. 1). In these penalties, maximum limits apply.
Failure to Furnish Correct Payee Statements
The failure to give correct payee statements would result to civil liability if done willfully and deliberately. Any person or individual who fails to furnish a taxpayer with the right copy of an information return involving the data on payee by the due date would face a penalty of $50 for each statement. If the failure is due to intentional disregard of the requirement, the penalty is the greater of $100 each statement or 10% or 5% of the amount to be shown on the statement and which depend on the kind of statement (IRS Tax Attorney Website, 2009, p. 1).
Failure to Give Identification Numbers and Other Information
The penalty of $50 for each failure is imposed against any person or taxpayer who does not comply with other specific reporting requirements such as the utilization of exact identification numbers like employer identification numbers and social security numbers (IRS Tax Attorney Website, 2009, p. 1). The provisions of the law include penalties for failure to file returns or pay taxes as required (IRS Tax Attorney Website, 2009, p. 1).
In imposing tax civil penalties, failure to file return and pay taxes within the given period including extensions are the basis. It also includes understatement of the tax return and filing frivolous return. In case of filing late income tax return, there is also a penalty to be imposed. Filing tax return by the due date is very important. The failure-to-file penalty is applicable in this case. The penalty is founded on the tax not paid by the due date without including extensions given (IRS Tax Attorney Website, 2009, p. 1). The usual penalty is 5% per month or part of a month that an income tax return is late, up to a maximum of 75% (IRS Tax Attorney Website, 2009, p. 1).
In addition, failure to file income tax return because of fraudulent machinations will also be penalized. The penalty is 15% per month or part of a month that your return is late, up to a maximum of 75% (IRS Tax Attorney Website, 2009, p. 1).
Besides, the minimum penalty is the smaller of $100 or 100% of the unpaid tax if a taxpayer files a return more than 60 days had lapsed after the due date and extensions (IRS Tax Attorney Website, 2009, p. 1). In this civil penalty, there is an exception given. A taxpayer may not pay the penalty for very late filing of return if he showed that his failure was due to reasonable cause and not due to willful disregard of the duty.
For paying tax late, the taxpayer needs to pay a failure-to-pay penalty of ½ of 1% of unpaid taxes for each month, or part of a month, subsequent to the due date that the tax was not paid. However, this penalty is not applicable during the extension period given by filing Form 4868 which is an application for automatic extension of time to file U. S. individual tax return, if the taxpayer paid at least 90% of actual tax liability before the original due date of the return by means of withholding on salaries, estimated tax payments, or a payment sent in with Form 4868 (IRS Tax Attorney Website, 2009, p. 1). When notice of intent to levy is issued, the value will increase to 1% at the beginning of the first month which starts at least 10 days following the day that the notice is issued. In addition, if notice and demand of immediate payment is issued to a taxpayer, the value will augment to 1% at the beginning of the first month which starts following the day that the notice and demand is issued. This civil penalty, however, cannot be imposed exceeding 25% of unpaid tax. There is no payment of penalty if showing good and reasonable cause is done and validated. Lastly, this failure-to-pay penalty is added to interest charges on late payments (IRS Tax Attorney Website, 2009, p. 1).
The combined penalty is also an option in applying tax civil penalties. If both the failure-to-file penalty and the failure- to-pay penalty apply in whatever month, the 5% or 15% failure-to-file penalty is lessened by the failure-to-pay penalty. Yet, if the taxpayer files return more than 60 days following the due date or extensions, the minimum penalty is the lesser of $100 or 100% of the unpaid tax (IRS Tax Attorney Website, 2009, p. 1). The reasons for paying accuracy-related penalty are underpayment due to negligence or disregard of regulations and substantial understatement of income tax. The penalty is equivalent to 20% of the underpayment. If there is fraud, then underpayment will not be figured out.
The penalty of negligence or disregard is based on the part of the underpayment due to negligence or disregard of rules or regulations, and not on the entire underpayment on the income tax return (IRS Tax Attorney Website, 2009, p. 1). On adequate disclosure penalty, it can be avoided if non-disclosure of adequate data is reasonable and valid. The substantial understatement of taxes means the tax reported is lesser than the proper tax. The penalty can be reduced when substantial authority and or adequate disclosure and reasonable basis is given (IRS Tax Attorney Website, 2009, p. 1). In cases of frivolous return, the penalty is $500. Frivolous return also includes altering the pre-printed language above the space provided for the taxpayer’s signature. The said penalty must be paid in full upon notice and demand from Internal Revenue Service even if the taxpayer is processing protest on the penalty. If there is underpayment of tax on a taxpayer’s return because of fraud, the penalty is 75% of the underpayment. Moreover, the penalty on a joint return does not apply to spouses except when some parts of the underpayment is due to the fraud of that spouse. Other matters to be avoided are failure to supply social security number and failure to furnish tax shelter registration number because civil penalties can be imposed if these are committed by taxpayers.
There are three common criminal penalties in the law of taxation and these are penalties for tax evasion; willful failure to file a return, supply information, or pay any tax due; fraud and false statements; and preparing and filing a fraudulent return. Tax evasion is a criminal practice wherein a taxpayer, organization, and corporation intentionally fail to pay its correct tax liabilities. The taxpayers who were detected from evading taxes are normally subject to charges that are criminal in nature. Tax evasion normally pertains to the deliberate will of the taxpayer to misrepresent or conceal the correct state of their activities to the tax authorities just to lessen legal responsibility for taxes. This criminal act includes incorrect tax reporting out of dishonesty. Dishonest reporting of tax data includes declaration of lower income, profits earned and overstatement of deductions.
Tax evasion is different from tax avoidance though. Tax evasion is considered criminal in nature because of its deliberate ability to defy the laws of the land. On the other hand, there are numerous ways to lessen the taxes of taxpayers of which he earned the inherent and implied right to do so. Tax avoidance is the legal use of the tax regime to the advantage of the taxpayer for a reduction of the tax liability due him.
Finally, criminal penalties can also be filed against taxpayers who willfully fail to file income tax return and supply information of the same. Any failure to pay tax due can also be considered criminal in nature in accordance with law. If a taxpayer committed fraudulent machinations while preparing income tax return by means of providing false statements, criminal penalties can also be applied. All these cases will be brought to trial as a criminal prosecution against erring taxpayers.
The payment of taxes is an obligation of an inhabitant of the country in accordance with law. The lifeblood of the government is the collection of taxes. Besides, the taxing power of the legislature is an inherent attribute of sovereignty. Hence, imposing penalties for failure to file return and pay taxes is proper and valid. The tax-related penalties include failure-to-file penalty, failure to-pay penalty, penalty for frivolous return, accuracy-related penalty, negligence, and disregard, substantial understatement of income tax, information reporting penalties, and failure to furnish correct payee statements, identification numbers and other information, civil penalties, filing late, fraud, return over 60 days late and its exception, paying tax late, combined penalties, accuracy-related penalty, negligence or disregard, adequate disclosure, substantial understatement of income tax, substantial authority, disclosure statement, frivolous return, underpayment due to fraud, joint return, failure to supply social security number, failure to submit tax shelter registration number, and criminal penalties which include tax evasion, willful failure to file a return, fraud and false statements or preparing and filing a fraudulent return. Some of these penalties may not be paid upon showing valid and reasonable causes.
Crockett, J. (1955). The Federal Tax System of the United States: A Survey of Law and Administration. New York: Columbia University Press.
Government Treasury Website. 2005. Procedures Regarding the Failure to Pay Tax Penalty Result in Inconsistent Treatment of Taxpayers and Hundreds of Millions of Dollars in Lost Revenue. Retrieved March 30, 2009, from http://www.
Hurley, P. Pleasure House.com. How To Avoid Tax Penalties. Retrieved March 30, 2009, from http://www.pleasurehorse.com/taxes/AVOID_PENALTIES.html.
Internal Revenue Service. 2008. Penalty for Failure to File Income Tax Return Increased. Retrieved March 30, 2009, from http://ftp.irs.gov/formspubs/article/0,,
IRS Tax Attorney Website. 2009. Background Information on IRS Tax Penalty. Retrieved March 30, 2009, from http://www.irstaxattorney.com/penalty.html.
ITRL Iowa Website. 2008. Frivolous Return Penalty. Retrieved March 30, 2009, from http://www.google.com/search?sourceid=navclient&ie=UTF-8&rlz=1T4SKPB_