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Income Tax Penalties

There are several ways to get penalized by the Internal Revenue Service (IRS) when filing a tax return.

The most obvious way is to not file at all if you have taxable income for a particular year or to have filed late for no apparent reason or to have participated in a withdrawal of funds or received dividends on retirement or investment income.

If the IRS conducts an audit on your return and find that there are discrepancies, especially obvious discrepancies due to negligence or flagrant violations of tax laws, you could be penalized from a few dollars up to the maximum that the tax laws allow.

  • A negligent taxpayer is one who doesn't make a reasonable attempt to follow the rules and regulations set forth by the IRS.


  • Understating taxable income on your return is a clear violation of federal tax laws and the penalty may total up to 20% of the underpayment.

  • A fraudulent taxpayer is one who knowingly and willfully set out to defraud the government by understating earned income or claiming unreasonable amounts of deductions to obtain a large refund.

If an underpayment is due to fraud, a 75% penalty on the amount not reported may be assessed to the filer or if the IRS determines that the underpayment was due to fraud, it may assess the whole amount as fraud.

Penalties are also assessed if a taxpayer understates the tax liability on reportable tax transactions and claim deduction for the purpose of avoiding paying taxes.

There may also be a higher interest cost imposed on a taxpayer if he or she fails to submit a timely return, commit negligence or fraud, state overvaluation of a property, submit substantial understatement of taxable liability, or undervalue basis of a gift or estate tax property.

Any penalty that is imposed by the IRS can be disputed. It is up to the taxpayer to keep good records of all taxable transactions in case of an audit and/or a penalty.

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