Separate penalties apply for failing to pay and failing to file. The failure to pay penalty the “gentler” of the two, running at 1/2% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 20, the penalty is 1% (1/2% times 2 months (or partial months). The maximum penalty is 25%.
The failure to pay penalty is based on the amount shown as due on the return (less credits for amounts already paid, e.g., via withholding or estimated payments), even if the actual tax bill turns out to be higher. On the other hand, if the actual tax bill turns out to be lower, the penalty is based on the lower amount.
For example, if your payment is two months late and your return shows that you owe $5,000, the penalty is 1% (see above), which equals $50. If you are audited and your tax bill increases by another $1,000, the failure to pay penalty is not increased because it's based on the amount shown on the return as due. On the other hand, if the audit reveals that your tax due should have only been $4,000, the penalty is reduced to $40.
Many if not all penalties may be excused by IRS if your lateness is due to "reasonable cause". This is a legal term and requires specifics of your case in order to apply for the "reasonable cause" exception. You can not simply write up reasons YOU believe is a reasonable cause. There are very specific legal guidelines for the definition of "reasonable cause".
Interest is assessed at a fluctuating rate announced by the government and compounded daily apart from and in addition to the above penalties.
Following a notice of tax lien comes the tax levy. This is where the IRS comes and takes possession of, and sells your house and anything else you may have of value. The fact that you live in an homestead state will not save you or your house. The IRS has the authority to take anyone’s home. There are ways to stop them, but you will need to contact a tax attorney as soon as possible.
Anyone faced with any criminal tax charge will most likely also be charged with money laundering or wire/mail fraud. This is because most tax crimes are conducted by the use of these other crimes. These other crimes are usually committed without the tax payers knowledge.
Due to its steep rate, the civil fraud penalty is one of the most powerful tools that IRS has. It applies if any part of a tax underpayment is due to fraud, and the penalty equals 75% of that portion of the underpayment attributable to fraud. Although IRS has the burden of proving fraud by clear and convincing evidence, if it shows that any portion of an underpayment is due to fraud, the entire underpayment is treated as attributable to fraud except for any portion that the taxpayer shows (by a preponderance of the evidence) not to be so attributable.
Other adverse results also flow from a civil fraud determination. For example, no time limit exists on the assessment and collection of tax if a fraudulent return is filed. Likewise, a return subject to the civil fraud penalty is treated as fraudulent for bankruptcy purposes. As a result, taxes shown on such a return are not normally discharged in a bankruptcy proceeding.
Although civil fraud is not statutory defined, some courts have defined it as an actual and deliberate, or willful, wrongdoing with specific intent to evade a tax believed to be owed. Fraudulent intent is rarely shown by a single act or by direct proof of a taxpayer's intent. Instead, it's usually shown by looking at all of the facts and circumstances.
A separate fraudulent failure to file penalty, imposed at a maximum rate of 75%, may apply to late-filed or non-filed returns.
Certain constitutional defenses to the civil fraud penalty, including double jeopardy, have been rejected because the penalty is civil and not criminal in nature. However, as with many other tax penalties, the civil fraud penalty can be avoided by showing legal reasons. Taxpayers have often been successful in avoiding the civil fraud penalty.
Tax Evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).
Tax evasion is a crime in almost all countries and subjects the guilty party to fines or imprisonment.
Switzerland is a partial exception. Many acts that would amount to criminal tax evasion in other countries are treated as civil matters in Switzerland. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited.
In the United States, persons subject to the Internal Revenue Code who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States), but they often do not do so, because doing so could serve as an admission of guilt. Suspected lawbreakers, most famously Al Capone, have been charged with tax evasion when there is insufficient evidence to try them for their non-tax related crimes. By contrast: In the UK law enforcement agencies do not generally have access to tax returns and so illegal earnings can supposedly be safely declared but in practice those carrying on criminal activities generally prefer not to do so, and so can sometimes be prosecuted for tax evasion rather than for other crimes.
There is always the possibility of the attempt to evade tax criminal penalties. This charge is a felony and can carry the sentence of 5 years in prison and a fine of $100,000.00 for an individual and $500,000 for a corporation. This charge can be applied to a failure to file case if additional steps are taken in conjunction with a failure to file that demonstrates an attempt to evade the payment of tax. Examples of these steps are as follows: keeping double books, false entries or alterations to books, false documents or invoices, destruction of documents or books, concealing assets, covering up sources of income, transactions that avoid book entries, conduct likely to mislead. It is important to realize that the I.R.S. decides when actions are considered reason to initiate criminal investigations and the taxpayer is not warned. It is very important that a trained professional be the one in communication with the I.R.S. as soon as a conflict arises.
The failure to file penalty, also known as the delinquency penalty, runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you obtain an extension for your filing due date, you are not filing late unless you miss the extended due date. However, a filing extension does not apply to your responsibility for payment.
If the 1/2% failure to pay penalty and the failure to file penalty both apply, the failure to file penalty drops to 4.5% per month (or part) so the total combined penalty remains at 5%. The maximum combined penalty for the first five months is 25%. Thereafter the failure to pay penalty can continue at 1/2% per month for 45 more months (an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time. But this does not include interest which compounds daily, and continues for ever.
The failure to file penalty is also more severe in that it is based on the amount required to be shown on the return, and not just the amount shown as due. (Credit is given for amounts paid, for example, via withholding or estimated payments. So if no amount is owed, there is no penalty for late filing.) Thus, for example, if a return is filed three months late showing $5,000 owed (after payment credits), the combined penalties would be 15%, which equals $750. If the actual tax liability is later determined to be an additional $1,000, the failure to file penalty (4.5% x 3 = 13.5%) would also apply to this amount for an additional $135 in penalties.
A minimum failure to file penalty will also apply if you file your return more than 60 days late. In this case, the failure to file penalty is at least $100. Even here, however, if you owe no taxes, there is no penalty.
Internal Revenue Code section 6321 provides:
Sec. 6321. LIEN FOR TAXES.
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.
The term "assessment" refers to the statutory assessment made by the Internal Revenue Service (IRS) under 26 U.S.C. § 6201 (that is, the formal recording of the tax in the official books and records of the U.S. Department of the Treasury). Generally, the "person liable to pay any tax" described in section 6321 must pay the tax within ten days of the written notice and demand. If the taxpayer fails to pay the tax within the ten day period, the tax lien arises automatically (i.e., by operation of law), and is effective retroactively to (i.e., arises at) the date of the assessment, even though the ten day period necessarily expires after the assessment date. Internal Revenue Code section 6322 provides: