Civil and Criminal Tax Penalties

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Failure to pay taxes or follow the Internal Revenue Service’s rules and regulations can result in serious civil and criminal penalties. This article highlights the civil penalties for some of the common actions or omissions by taxpayers, as well as the penalties for various tax crimes.
If you have questions about tax violations and potential penalties, contact an experienced tax attorney at our firm.

Civil Penalties

The Internal Revenue Service (IRS) has various procedures in place for assessing civil penalties. The following list highlights some of the actions for which the IRS will impose a civil penalty:

  • Failure to file a return: There is a 5 percent penalty based on the amount of tax due for each month during which the failure to file continues. The aggregate penalty is limited to 25 percent of the net amount due. If there is fraud, the penalty increases to 15 percent and an aggregate of 75 percent. The penalty can be avoided if the taxpayer can show that there was a reasonable cause for the failure and it was not the result of willful neglect.
  • Failure to pay: There is a 0.5 percent penalty based on amount of tax due for each month during which the taxpayer fails to pay, with the aggregate penalty capped at 25 percent of the net amount due. If there is a failure to file and failure to pay, the aggregate combined penalties cannot be more than 47.5 percent of the amount due. The taxpayer can avoid this penalty if he or she can show that the failure was due to reasonable cause and not willful neglect.
  • Accuracy-related penalties: If a taxpayer understates his or her tax liability because of an inaccurate position taken on a return, there is a 20 percent accuracy-related penalty. Generally, a negligence theory or the fact that a taxpayer disregarded IRS Regulations can be used to support liability for accuracy-related penalties.
  • Substantial valuation misstatements: If a taxpayer makes a substantial valuation misstatement, the penalty is generally 20 percent of the underreported tax liability. The penalty can increase to 40 percent of the underreported tax liability if the underreported amount was due to a gross valuation misstatement. The penalty may be imposed even if the taxpayer did not act negligently. There is no penalty for a substantial valuation misstatement if the taxpayer can prove that the misstatement was due to reasonable cause, but there is no reasonable cause exception for a gross valuation misstatement.
  • Civil tax fraud: Tax fraud is the intentional action designed to evade a tax that is believed to be due and owing. There is a 75 percent penalty for filing a fraudulent return. A taxpayer can defend against a charge of tax fraud by showing the following: that there was a disclosure to the IRS or a tax advisor, that a mistake of law caused the taxpayer to underreport the tax, that the taxpayer reasonably relied on someone else’s advice or that the taxpayer lacked the capacity to form an intent to commit fraud.

Criminal Penalties

Agents of the IRS’s Criminal Investigation Division investigate criminal federal income tax cases. The following are some of the more common tax crimes:

  • Tax evasion: To establish a case for tax evasion under section 7201 of the Internal Revenue Code (IRC), the government must prove each of the following beyond a reasonable doubt: that the taxpayer attempted to evade or defeat a tax or payment of a tax; an additional tax was due and owing; and the taxpayer acted willfully.
  • Willful failure to collect or pay over taxes: Section 7202 of the IRC provides that any person required to collect and pay over taxes (such as excise and withholding taxes) who willfully fails to do so shall be guilty of a felony and face a fine of up to $10,000 or a prison term of no more than 5 years or both. There have been few prosecutions under this section.
  • Failure to file a return: Under section 7203 of the IRC, the government must prove beyond a reasonable doubt that the law required the taxpayer to file a return; the taxpayer failed to do so within the time required by law; and the failure was because of a willful omission.
  • Withholding violations: Sections 7204 and 7205 of the IRC make it a misdemeanor crime for an employer to file a false or fraudulent W-2 or to fail to file a W-2 and for an employee to file a false or fraudulent W-4 or to fail to file a W-4. These sections are rarely used.
  • Fraud and false statements: The elements of the crime of fraud and false statements under section 7206(1) are that the defendant made and subscribed a tax return or other document containing a written declaration that it was made under penalty of perjury when he or she knew it was materially false, and that the defendant acted with a specific, willful intent to break the law.
  • Aiding and abetting: Section 7206(2) is generally used against tax preparers. This section makes it a crime for any person to willfully aid, assist in or advise the preparation or presentation of a tax return, claim or other document that is fraudulent or materially false, whether or not the person who is required to present the return or other document knows about or consents to the fraud or falsity.
  • Fraudulent returns, statements and other documents: Section 7207 provides that any person who willfully delivers or discloses any return, statement or other document known to be fraudulent or materially false shall be fined no more than $10,000 ($50,000 in the case of a corporation) or be imprisoned for not more than one year or both.

Speak to a Tax Attorney

Failure to comply with the IRS’s rules and regulations can result in serious civil and criminal penalties.
An experienced tax lawyer at our firm can explain the possible penalties and advise you on how to proceed.

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