Failure to File Penalties Explained

Overview of IRS Failure-to-file Civil Penalties

Criminal tax evasion cases are difficult to establish in court, because there are so many moving parts and the burden of proof is so high. Much like the case against Mr. Capone, the criminal prosecution may only be Round One, because the IRS still has tools available to get what it wants, viz, to punish the wayward taxpayer and extract money from said miscreant.

In fact, the evidentiary tables are turned in civil tax penalty cases. In general, taxpayer defendants have the burden of persuasion to show that the tax was not due, and the IRS must only make a barebones showing under IRC 7491(c) that it had a rational basis to bring the actions.

Simple Failure to File

6651(a) cases are by far the easiest civil tax penalties to establish in civil court, since the IRS must only prove that the taxpayer made a mathematical error. Malicious intent, or the lack thereof, is completely irrelevant. Typically, the civil tax penalty is 5 percent of the unpaid amount per month up to a maximum 25 percent. One of the major exceptions involves filing an inaccurate Form 8300 (cash transaction over $10,000), which carries a $25,000 per violation maximum penalty.

A related matter is failure to pay estimated taxes. Taxpayers usually don’t owe a penalty, regardless of the amount due, if the current year’s estimated tax payments would cover at least 90 percent of the previous year’s gross income. Taxpayers must use Form 2210 to calculate the cvil tax penalty amount due, but in lieu of this form, the IRS is more than happy to calculate the amount due for you.

Fraudulent Failure to File

If the IRS is unable to establish a criminal case, agents usually start preparing a 6663(a) case on their way back to the office from the courthouse. The Service must establish, by clear and convincing evidence, that the taxpayer fraudulently understated at least some of the reported income. Presumptively, the 75 percent penalty applies to the entire understatement as opposed to the fraudulent portion of said understatement.

To establish fraud in this or any other civil tax penalties case, there must normally be two or more fraud badges:

  • Failing to file a return (as opposed to failing to timely file a return),
  • “Willful” failure to pay (the taxpayer paid any other vendor, such a s a landlord, during the period in question),
  • “Intentional” failure to report all income (a 25 percent understatement is usually the line of demarcation between accidental and intentional for the IRS),
  • A false return, and
  • Patently fraudulent or false deduction or income claims.

Taxpayers can limit the 75 percent penalty to the fraudulent portion of their returns if they can prove that all other understatement was nonfraudulent, and lots of luck with that.

Defending Civil Tax Penalty Cases

These cases, much like the criminal cases which usually precede them, are usually won or lost during the pretrial phase. If things look bleak, an attorney can usually persuade the IRS to pursue a softer 6651(a) claim instead of bringing out the big guns. Ironically, prior issues with inaccurate returns may actually help the taxpayer, so long as simple miscalculation caused such errors.

Furthermore, an early resolution conserves thet taxpayer’s resources, usually involves no admission of liability, often involves a payment plan, and always gives the taxpayer peace of mind that, this time, the matter is truly resolved.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.