IRS Penalties Law & Legal Definition

The Internal Revenue Service is authorized to assess penalties for various tax violations, including, among others, late filing, late filing due to fraud, late payments, negligence or disregard of IRS tax rules and IRS tax regulations, substantial understatements of income tax owed, and fraud. The amount of the penalty varies by offense and amount owed, but may be sizeable, especially in fraud cases. Also, interest, compounded daily, is charged on any unpaid tax from the due date of the tax return until the date of tax payment. That rate is determined every three months.

You may be able to get the IRS to drop the tax penalty if you can show that your mistake was an honest error. Tax penalties can be avoided if the relevant facts affecting the item's tax treatment are adequately disclosed in the tax return. However, disclosure cannot be used to avoid incorrect valuation tax penalties.

Another way to dispute a tax penalty is to provide authoritative justification for your tax treatment of an item via tax documents published in the Internal Revenue Bulletin, tax court cases, private letter rulings issued by the IRS, and some congressional reports. Authority supporting your tax position should outweigh the contrary tax treatment authority.

The penalties for filing and paying late may be abated if you have reasonable cause. If you're billed for either penalty and feel you have reasonable cause, send your explanation along with the bill to your service center, or call the IRS at 1–800–829–1040 for assistance. Generally, interest charges may not be abated; they continue to accrue until all assessed tax, penalties, and interest are paid in full. Generally, any reasonable cause exception to the penalty for failure to pay tax cannot be determined until the tax is first paid in full.

If a tax penalty is assessed by the IRS, you can appeal. While the appeal is under consideration, payment of the tax penalty is suspended. You also have a right to representation and can ask to have a meeting with the IRS. Tax laws are complex and constantly changing, so a tax professional should be consulted if you have questions concerning your tax liability.