Key Takeaways:
- Accuracy-related penalties, also known as a Section 6662 penalties, can be detected by the IRS’s AUR program
- The AUR uses an algorithm to identify discrepancies in what taxpayers report to the IRS versus what other third parties have reported
- The two types of accuracy-related penalties are the substantial understatement of income tax penalty and the negligence or disregard of the rules or regulations penalty
- These penalties can lead to a charge of 20% of the underpayment of taxes
- Reasons you might get an accuracy-related penalty include:
- Understating your taxable income
- Overstating deductions or credits
- Failing to keep adequate records
- Ignoring tax laws and regulations
- Making errors on your tax return
- Strategies to avoid getting accuracy-related penalties include:
- Stay organized
- Double-check your math
- Be cautious with tax deductions and credits
- Follow tax laws and regulations
- Seek guidance from tax professionals
- Incorporate tax software
- Respond to the IRS right away
Filing and paying taxes is something many Americans dread. The process is time consuming and requires close attention to detail, but making a mistake can also lead to fees and penalties. The IRS has systems in place to check for any inconsistencies, ensuring taxpayers pay everything they owe and report income and expenses properly.
The Automated Underreporter (AUR) program is an important component of the tax system that has been in place for several years. The program is designed to detect discrepancies between the income reported by taxpayers and the income that is actually owed to the government. Taxpayers who are found to have underreported their income may face accuracy-related penalties. These penalties could be significant, with fines and interest charges that could add up to large sums of money, on top of your tax liability.
The IRS made some significant changes to the AUR program in 2022. These changes are aimed at making the process more accurate and efficient in an effort to ensure taxpayers are reporting and paying taxes properly. The system still closely monitors tax returns for accuracy issues that can lead to accuracy-related penalties for taxpayers, so not much has changed there. This guide dives into the details of the AUR, reasons you might be hit with accuracy-related penalties, and strategies to avoid them.
What Are Accuracy-Related Penalties and Why Are They Important?
An accuracy-related penalty, also known as a Section 6662 penalty, is a fee charged to taxpayers who have not reported accurate income tax, deductions, or credits on their tax returns. These penalties are often assessed against taxpayers who make mistakes or omissions that result in an underpayment of tax owed. The penalties are typically assessed as a percentage of the underreported amount and can add up to large sums of money.
The purpose of these penalties is to ensure taxpayers are held accountable for their reporting accuracy and to deter them from making careless mistakes or intentionally underreporting their income. The IRS takes accuracy very seriously, as it relies on accurate reporting to collect the appropriate amount of tax revenue owed to the government each year.
Accuracy-related penalties ultimately serve as a tool for the IRS to promote and enforce compliance with tax laws. Taxpayers should take care to accurately report their financial information to avoid these penalties, since they can have a huge financial impact.
What Is the AUR?
The AUR is a program used by the IRS to identify discrepancies between the income reported by taxpayers on their tax returns and the information the IRS receives from other sources. The AUR system is designed to detect underreported income, unclaimed deductions, and unreported credits.
The AUR program is an automated process that uses computer algorithms to match taxpayer information against data from third-party sources, including W-2 forms and salary reports, 1099 forms, and other financial information reported to the IRS. The agency will send a notice to the taxpayer when discrepancies are detected, informing them of the issue and requesting additional information or clarification. Accuracy-related penalties are often applied to taxpayers who are found by the AUR program to have underreported their income.
This program ensures taxpayers pay their fair share of taxes. The AUR helps identify taxpayers who have underreported their taxable income and ensures that they are held accountable for their reporting accuracy.
The IRS made significant changes to the AUR program in 2022 to improve its accuracy and efficiency, including procedural improvements. The agency aims to promote consistency in the tax system while ensuring taxpayers are fulfilling their duty to pay what they owe.
Types of Accuracy-Related Penalties According to the 2022 AUR
You may have to deal with an accuracy-related penalty if the AUR flags your tax return for a specific accuracy-related issue with your numbers. There are two types of accuracy-related penalties the IRS can assess, each with its own requirements:
Substantial Understatement of Income Tax Penalty
The substantial understatement of income tax penalty is assessed if you underreport your tax liability by 10% or more on the tax required to appear on your tax return, or $5,000, whichever is greater. The penalty in this case is 20% of the portion of the payment you understated on your return.
Negligence or Disregard of the Rules or Regulations Penalty
The negligence or disregard of the rules or regulations penalty is assessed if a taxpayer fails to make a reasonable effort to comply with tax laws. An example may be leaving off income that was on another tax form, and another may be failing to ensure you qualify for a credit you’re claiming. The penalty in this case is 20% of the portion of underpayment that came from your disregard or negligence.
These penalties can be significant, especially if you underpaid a large amount. Always be careful with what you report on your tax return to avoid these triggers in the AUR system.
Five Reasons You May Get an Accuracy-Related Penalty
Avoiding this IRS penalty can help ensure you don’t have to pay more than what you owe for taxes. This starts with understanding the situations that trigger this penalty a bit better. Here are five reasons you could get this penalty:
1. Understating Your Taxable Income
Many taxpayers try to get away with reporting less income than they actually earned throughout the year. They want to lower their tax burden this way. This can backfire, however, since the AUR can detect differences in what you report and what third parties have reported to the agency. Understatement of income is a common reason people get hit with the accuracy-related penalty each year.
2. Overstating Deductions or Credits
Another way to lower your taxable income is to overstate your deductions or credits. Maybe you report expenses larger than they actually are, or you try to claim a credit you don’t actually qualify for. You could then be hit with an accuracy-related penalty, even if you didn’t realize your mistake at the time.
3. Failing to Keep Adequate Records
Remember that just because you receive a notice about a penalty, it doesn’t mean you necessarily did anything wrong. Sometimes all you need to do is show the IRS proof that you qualify for a credit or deduction you’re claiming. You may lose your chance to prove this to the agency, however, if your records are not updated, accurate, or complete and you’ll end up having to pay the penalty.
4. Ignoring Tax Laws and Regulations
You always need to ensure you’re paying what you owe, reporting all your income and expenses correctly, and meeting tax deadlines. You will face penalties if you ignore the law or think it doesn’t apply to you.
5. Making Errors on Your Tax Return
Some mistakes aren’t purposeful. You may be doing your taxes in a hurry, and you transpose a number or leave off a zero. Maybe you calculated your total income incorrectly after adding up all your tax forms, like your W-2s and 1099s. Errors in your arithmetic can unfortunately lead to the accuracy-related penalty.
These mistakes show how important it is to be diligent when preparing your taxes. Talk to a tax professional if you have a complex tax situation or you just have questions about what you’re eligible for. You never want to risk a penalty or legal charge from the IRS.
Strategies for Avoiding Accuracy-Related Penalties
You can take several steps to ensure you don’t have to deal with the AUR flagging your tax return or getting hit with a penalty. Here are seven strategies to avoid accuracy-related penalties from the IRS:
1. Stay Organized
Your first step is to keep accurate records. Save documents and put a system in place for tracking your income and expenses. Keep a record of all your transactions and life changes throughout the year to ensure accuracy when filing your tax return.
2. Double-Check Your Math
The simplest arithmetic errors can lead to tax calculation mistakes and cause you to incur penalties. Double-check your tax forms you receive from employers or third parties. Verify everything adds up correctly before filing.
3. Be Cautious With Tax Deductions and Credits
Be sure to not overstate the value of your deductions and credits. Do your research to ensure you qualify for everything you’re claiming to lower your income or tax liability. Claiming too many deductions without proper documentation can lead to an accuracy-related penalty.
4. Follow Tax Laws and Regulations
Stay up to date with tax laws and regulations to ensure compliance and avoid any potential penalties. Follow news about upcoming changes that could impact your business or your tax return. Tax law can change frequently, so find a trusted source for updates.
5. Seek Guidance From Tax Professionals
Consult with a tax expert for guidance on all tax matters, especially if you are unsure how to tackle a complex situation. A tax professional will understand exactly what you qualify for and how to complete your tax return. They know anytime tax law changes and can explain how it affects you.
6. Incorporate Tax Software
Tax software is another great tool to use to improve your tax preparation practices. Using tax software can help you stay organized, verify your calculations, and ensure compliance with tax laws and regulations. It also helps you complete everything more efficiently.
7. Respond to the IRS Right Away
Respond as soon as possible anytime you get a notice from the IRS. Failing to respond to a notice sent by the AUR program can lead to a notice of deficiency, which you want to avoid. You never want to make your situation with the IRS worse.
Follow these strategies to minimize your chances of receiving accuracy-related penalties from the IRS. Remember that you never have to deal with questions or issues on your own. Talk to a tax attorney if you receive a notice about an accuracy-related penalty in the mail.
Get Help to Avoid Accuracy-Related Penalties
Accuracy-related penalties can be a significant burden for taxpayers. Carelessness, recklessness, and other errors can lead to these costly penalties, but sometimes a simple accidental mistake can cause an issue as well.
The AUR program uses automated reviews of returns to identify underreported income, which can lead to accuracy-related penalties if not properly addressed. Always take proactive steps, such as staying organized, double-checking your math, following tax laws, seeking guidance from tax professionals, and using tax software to avoid these penalties.
The team at Silver Tax Group is ready to help you when you need tax assistance. We understand what triggers penalties from the IRS and through the AUR, and how to avoid them. We’ll walk you through all your reporting requirements and help you ensure you’re only claiming tax breaks that you’re eligible for.
Our tax attorneys also provide assistance with audit defense, tax debt resolution, bookkeeping and accounting, IRS investigations, and much more. Reach out to Silver Tax Group to speak to a tax expert about the AUR changes in 2022 and avoiding accuracy-related penalties with your tax return.
