Please wait, loading...

 

IRS Penalties in case of Tax Filing Errors - AG Tax LLP

August 12, 2011

The penalties applied by the IRS for filing infractions can be severe and punitive nor is the IRS reticent to apply them. Penalties are not limited to income tax forms but are also applied to information forms. We have listed a few of the most common forms that you may have to complete below and set out the penalties that can be applied by the IRS.

Form 1040 (US Individual Income Tax Return)
Form 1040NR (U.S. Nonresident Alien Income Tax Return)
Form 1040NR-EZ (U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents)

Penalty for Late Filing
If you owe tax and don’t file on time, the total late-filing penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to five months (maximum 25%). If your return is over 60 days late, the minimum penalty for late filing is the lesser of $100 ($135 for returns required to be filed after December 31, 2008) or 100 percent of the tax owed.

Penalty for failing to file
If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is 5% of the tax not paid by the due date for each month or part of a month that the return is late. This penalty cannot be more than 25% of your tax, but it is reduced by the failure-to-pay penalty for any month both penalties apply. However, if your return is more than 60 days late, the penalty will not be less than $100 or 100% of the tax balance, whichever is less. You will not have to pay the penalty if you can show reasonable cause for not filing on time.
If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.

Penalty for frivolous return
You may have to pay a penalty of $500 if you file a return that does not include enough information to figure the correct tax or that shows an incorrect tax amount due to:

  • A frivolous position on your part, or
  • A desire to delay or interfere with the administration of federal income tax laws.

This penalty is in addition to any other penalty provided by law. The amount of the penalty for frivolous tax returns can be increased from $500 to $5,000 and imposed on any person who submits a “specified frivolous submission.” A submission is a “specified frivolous submission” if it is defined as a specified submission in section 6702(b)(2)(B) of the code. There are 46 specifically defined frivolous submissions published in Internal Revenue Bulletin 2010-17.

Failure-to-pay penalty
You may have to pay a penalty of 1/2 of 1% of your unpaid taxes for each month or part of a month after the due date that the tax is not paid. This penalty cannot be more than 25% of your unpaid tax. You will not have to pay he penalty if you can show good reason for not paying the tax on time.

Paying Tax Late
The failure-to-pay penalty is calculated based on the amount of tax you owe. The penalty is 0.5% for each month the tax is not paid in full. There is no maximum limit to the failure-to-pay penalty. The penalty is calculated from the original payment deadline (the original April 15th filing deadline) until the balance due is paid in full.

Accuracy-related penalty
An accuracy-related penalty of 20% applies to any underpayment due to:

  • Negligence or disregard of rules or regulations, or
  • Substantial understatement of income tax.

Substantial understatement of income tax
For an individual, income tax is substantially understated if the understatement of tax exceeds the greater of:

  • 10% of the correct tax, or
  • $5,000.

Even though an underpayment was due to both negligence and substantial underpayment, the total accuracy-related penalty cannot exceed 20% of the underpayment. The penalty is not imposed if there is reasonable cause accompanied by good faith.  If you underpay your tax due to fraud, you may be subject to a civil fraud penalty. In certain cases, you may be subject to criminal prosecution.

Interest
Interest is compounded daily based on each day your balance due is not paid in full. The IRS sets interest rate quarterly. The current interest rate for on tax owed is 4% per year.

Criminal Penalties that can be applied
You may be subject to criminal prosecution (brought to trial) for actions such as:

  • Tax evasion,
  • Willful failure to file a return, supply information, or pay any tax due,
  • Fraud and false statements, or
  • Preparing and filing a fraudulent return.

Tax Evasion – Prison term of up to 5 years and a maximum fine of $250,000.
Filing a False Return – Prison term of up to 3 years and a maximum fine of $250,000.
Failure to File a Tax Return – Prison term up to 1 year and a maximum fine of $100,000.

Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding)
Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons)

Withholding Agent Obligations.
When you make a payment of U.S. source income to a foreign person or entity you are normally required to withhold U.S. income tax at a rate of 30% and report it on Forms 1042-S and 1042 by March 15 of the year following the payment(s).

Failure to File
The penalty for not filing Forms 1042-S and 1042 when due (including extensions) is usually 5% of the unpaid tax for each month or part of a month the return is late, but not more than 25% of the unpaid tax. Additional penalties apply for failure to provide complete and correct information or failure to provide a complete and correct statement to each recipient. The maximum penalty is $100,000 per year.

Forms relating to Residential Status

The penalty for failure to file forms relating to resident status is $10,000.

Failure to supply social security number.

If you do not include your SSN or the SSN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. You will also be subject to a penalty of $50 if you do not give your SSN to another person when it is required on a return, statement, or other document.

Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR))

The following are the civil and criminal penalties that may be assessed by the IRS for failure to comply with FBAR reporting and record keeping requirements. Both Civil and Criminal Penalties may be imposed for the same infraction.

Negligent Violation.
Civil penalty: Up to $500

Non-Willful Violation.
Civil penalty: Up to $10,000 for each negligent violation.

Pattern of Negligent Activity.
Civil penalty: In addition to penalty for Negligent Violation not more than $50,000

Willful – Failure to File FBAR or retain records of account.
Civil penalty: Up to the greater of $100,000, or 50 percent of the amount in the account    at the time of the violation.
Criminal Penalty: Up to $250,000 or maximum 5 years in prison or both.

Willful – Failure to File FBAR or retain records of account while violating other laws
Civil penalty: Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.
Criminal Penalty: Up to $500,000 or maximum 10 years in prison or both.

Knowingly and Willfully Filing False FBAR.
Civil penalty: Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation.
Criminal Penalty: $10,000 or maximum 5 years in prison or both.

AG TAX LLP Can Help

If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.

Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.

We can assist with:

  • Canadian Personal and corporate tax returns
  • Cross Border Taxation and Business Planning
  • Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

  • 416-238-5920 (Greater Toronto Area, ON)
  • 604-538-8735 (Greater Vancouver Area, BC)
  • 780-702-2732 (Greater Edmonton Area, AB)

 

Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.

ABOUTAG Tax LLP
With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
OFFICEVancouver
12752 28th Ave, Surrey, BC, V4A 2P4
OFFICEEdmonton
104–4220 98 St NW Edmonton AB, T6E 6A1
ABOUTAG Tax LLP
With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
OFFICEVancouver
12752 28th Ave, Surrey, BC, V4A 2P4
OFFICEEdmonton
104–4220 98 St NW Edmonton AB, T6E 6A1

© AG Tax LLP | All Rights Reserved | Website by Aroma Web Design Vancouver

© AG Tax LLP | All Rights Reserved | Website by AromaWebDesign.com