IRS Negligence Penalty: Why Accuracy Matters

IRS Negligence Penalty: Why Accuracy Matters

The IRS negligence penalty is a penalty applied to people who understate the tax they owe. It is also known as the IRS accuracy-related penalty or the accuracy-related negligence penalty.

This penalty is assessed if your tax return is audited, and the IRS determines that it is inaccurate. If you underpaid your taxes, expect a negligence penalty charge of 20% of the total amount of unpaid taxes.

When Will the IRS Assess a Negligence Penalty?

The IRS usually assesses a negligence penalty after your tax return is filed and audited. If the IRS adjusts your tax account balance because you owe more taxes than reported, the accuracy-related penalty will be applied. Note that this penalty is often applied when you owe tax over $5,000 after the audit.

How Much is the IRS Negligence Penalty?

As mentioned in the introduction, a tax negligence penalty is 20% of the amount you underpaid. This penalty amount is substantial. It results in much more money being owed to the IRS and can negatively affect your finances going forward. Therefore, always be complete and accurate when filing your taxes.

How Does the IRS Define “Negligence”?

Negligence when applied to tax laws means that a taxpayer has not made a reasonable attempt to comply with tax reporting rules and regulations. There are several types of negligence often encountered by the IRS, including taxpayers underreporting income, claiming the wrong tax deduction or credit, failing to keep accurate and complete tax records, and having a history of not being tax compliant.

Negligence is easily avoided when taxpayers are organized and consistently file accurate tax returns.

What is the Difference Between Negligence and Tax Fraud?

There is a fine line between tax negligence and fraud. As taxes are complex for the average person, there is a certain degree of leniency from the IRS. Negligence is often accidental and not an indicator of malicious intent to defraud the IRS.

Whereas fraud is the intentional misrepresentation of a tax situation. Including fraudulent information in your tax returns is never a good idea and can have severe repercussions.

Negligence is usually caused by not paying close enough attention to your taxes while having no criminal intent. The most common types of actual tax fraud the IRS deals with include intentionally not reporting income, knowingly claiming false deductions, and deliberately misrepresenting other tax-related facts.

Can You Appeal Accuracy-Related Negligence Penalties?

Yes, you can appeal tax accuracy penalties. It is advantageous to dispute an IRS negligence penalty after it is proposed and before it is finalized. Failure to appeal within this period may result in your case being heard by the U.S. Tax Court.

When you appeal an accuracy-related penalty, it is important to show your attempts to comply with relevant tax laws honestly. A key aspect of the negligence penalty appeals process is including as many relevant details as possible to support why you believe your taxes are accurate.

Your accuracy appeal is more likely to be successful when you have enough information to prove you took the steps to file an accurate return but made a simple accidental error.

Do Negligence Penalties Qualify for First-Time Penalty Abatement?

Unfortunately, with tax negligence penalties, you will not qualify for first-time penalty abatement. The main factor that decides whether a negligence accuracy-related penalty applies to your tax return is based on your attempts to comply with tax laws by filing an accurate return.

Sometimes bad advice can lead to negligence penalties getting applied to your tax return. In situations when you relied on bad advice from a tax professional or even the IRS itself, the IRS may consider abating or even removing an accuracy penalty.

Will the IRS Waive or Remove Accuracy Penalties?

Yes, the IRS has the authority waive or remove accuracy penalties. If you made a simple one-off mistake when filing and agree to pay taxes owed because of your unintentional error, the IRS will consider reducing or dropping the penalty.

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