Key Takeaways:
- The negligence penalty is 20% of the amount you underpaid when you were careless, reckless, or intentional about ignoring tax laws.
- The IRS may assess this penalty when:
- You underreport income or make other tax return errors
- You don’t keep records to support your tax return claims
- You falsely claim deductions or credits
- Nine ways to avoid or resolve the negligence penalty:
- File on time
- Pay on time
- Set up a payment plan
- Report income, deductions, and credits accurately
- Respond to CP2000 notices immediately
- Apply for penalty relief
- Contest the penalty
- Check your return for mistakes
- Use IRS resources
- Work with a tax expert if you’re dealing with a negligence penalty
Paying taxes can be a major headache, especially if you can’t pay your full tax bill or have a complicated tax situation. You want to do everything you can to lower the amount of tax you have to pay, but only within what tax law allows.
The IRS issues penalties when taxpayers make mistakes or take deliberate, unlawful actions to try to get out of paying their tax bill. The IRS negligence penalty applies if the agency finds that you underpaid your taxes because of an intentional or careless mistake you made that violated tax law.
The good news is that there are simple ways to avoid or minimize the negligence penalty. Here’s your guide to what the IRS negligence penalty is, when you may get this penalty, and how to fight it.
What Is the IRS Negligence Penalty?
The IRS negligence penalty, one of two types of accuracy-related penalties, is assessed on taxpayers who don’t “make a reasonable attempt to follow the tax laws” when preparing their tax returns. The IRS says that disregard is “carelessly, recklessly or intentionally” ignoring tax rules or regulations.
These errors may lead to underpayment of a tax bill or a failure to file a tax return on time. Essentially, the taxpayer has failed to use reasonable care when preparing their taxes in some way.
The negligence penalty is usually charged when the taxpayer incorrectly reports income and tax owed or takes deductions and credits despite being ineligible. The penalty can range from 20% to 40% of the total amount that was underpaid. The penalty itself is in addition to any other taxes that may be owed or interest that has accrued on the penalty or tax balance.
This penalty is high and can mean an even bigger tax burden. The other type of accuracy-related penalty is the substantial understatement of income penalty, in which a taxpayer understates their income and tax liability. The negligence penalty differs in that there was something intentional or reckless about the way the taxpayer did not follow tax laws.
When You May Get the IRS Negligence Penalty
The IRS negligence penalty is imposed on taxpayers who are careless or negligent in the accuracy of their tax filings. The negligence penalty is most commonly imposed when an understatement of liabilities or an overstatement of credits leads to unpaid tax. It can sometimes take more than one error for the IRS to determine that negligence is at play. These situations can lead to the penalty:
Underreporting Income or Other Errors
A common cause of the negligence penalty is underreporting income, which leads to an understatement of your tax liability. Maybe you intentionally failed to include information from one tax form or you purposely did not report some of your income in an effort to lower your tax burden. Tax returns must have all income included, and all information reported must be accurate. Serious mistakes on a return that impact the amount of tax owed can lead to the negligence penalty.
Not Maintaining Records to Support Your Claims
The IRS may conduct an audit if they see discrepancies in your tax return or have further questions. You may have to pay a negligence penalty if you have not kept good records that support what you claim in your tax return.
Falsely Claiming Deductions and Credits
You can’t claim deductions or credits that you don’t qualify for. An example is including a deduction you legally can’t take and not making a reasonable effort to confirm whether you are, in fact, entitled to claim that deduction. The IRS states it this way: “Not checking the accuracy of a deduction or credit that seems too good to be true.” A reasonable taxpayer should know when a deduction seems too extreme to be possible.
You may have to pay this penalty if a mistake is uncovered during an audit or after if you receive an IRS CP2000 notice. The best way to avoid the IRS negligence penalty is to be meticulous when preparing your tax return and make sure all information is included and accurate. Seek help from a tax attorney or other tax professional when you’re not sure about something.
Nine Ways to Avoid or Resolve an IRS Negligence Penalty
You can avoid IRS penalties if you follow all tax laws and report everything correctly. You always want to take reasonable care when preparing your return and be sure to meet all applicable deadlines. It’s worth noting that negligence penalties don’t qualify for first-time penalty abatement, unfortunately. Take the following proactive steps to fulfill your tax obligations or find some relief from this penalty:
1. File Your Tax Return on Time
Your first step in avoiding tax penalties should be filing your return on time each year. The tax deadline is usually April 15 but may vary based on when holidays and weekends fall. Estimated quarterly taxes, if you’re required to pay them, are typically due on April 15, June 15, Sept. 15, and Jan. 15, but again, they may be different depending on holidays and weekends each year. Start preparing your taxes early in the year so you’re not strapped for time as the deadline gets closer.
2. Pay Your Full Tax Bill on Time
You will see how much tax you have to pay as soon as you file your tax return. Pay this tax immediately, by the tax deadline, to avoid any penalties. It is better to communicate with the IRS right away if you’re unable to pay for some reason instead of just ignoring your tax bill. You will need to pay everything you owe to avoid penalties unless you set up another arrangement with the IRS (discussed below).
3. Set Up a Payment Plan
The IRS will work with taxpayers who can’t afford to pay their full tax bill immediately. You can apply for a payment plan, which allows you and the IRS to come to an agreement about making your payments in installments. You can apply for a short-term plan, which is 180 days or less, or a long-term plan, through which you pay a set amount monthly for a longer period. You can qualify for the short-term plan if you owe less than $100,000 in combined tax, penalties, and interest, and the long-term plan if you owe $50,000 or less in combined tax, penalties, and interest and are up to date with your tax return filings. You can apply for a payment plan online.
4. Report Income, Credits, and Deductions Accurately
You may be hit with a negligence penalty if you underreport your income or overreport your credits and deductions. Include all income you receive throughout the year even if you didn’t receive a tax form from the payer – for example, the payer may be one of your clients if you’re an independent contractor. Never leave out income. It’s also important to make sure you meet eligibility requirements for any and all credits and deductions you take. Failing to do this means the IRS will think you acted carelessly or intentionally to try to reduce what you have to pay in taxes.
5. Respond to CP2000 Notices Immediately
A CP2000 notice states that the information you reported on your return doesn’t align with other documents the IRS received, such as tax forms from your employers or banks. This notice isn’t a penalty, but you may still be subject to one based on what it says. Read the notice thoroughly, respond right away, and provide any information the IRS asks for. There will be a deadline provided on the notice that you have to respond by. The IRS may have incorrect information, but if you don’t follow instructions properly, you could still incur a penalty.
6. Apply for Penalty Relief
The IRS sometimes removes or reduces a penalty if you can show a reasonable cause for why you didn’t meet your obligations or that you acted in good faith. For accuracy-related penalties, the IRS considers factors like your efforts to report the right amount of tax, your knowledge of tax law, and what you did to get help from a tax advisor. Your penalty notice will have a number you can call to request penalty relief.
7. Contest the Penalty
You can contest your penalty between the window of receiving your CP2000 notice and the IRS actually assessing the penalty. You will have to show you made all reasonable attempts to comply with tax law but an unforeseen circumstance got in the way of your ability to do so. For example, you can show that you used incorrect data for your tax return from a Form 1099 or W-2, or even that you relied on guidance from the IRS. You just need to show that you tried to follow regulations and did your best.
8. Check Your Return for Mistakes
Everything you include in your tax return needs to be accurate. This includes your income, deductions, and credits, but also your expenses, filing status, dependent information, and any major events that occurred during the year the IRS asks about, like buying a house or getting married. Double- and triple-check everything before you submit so your numbers are accurate.
9. Use IRS Resources When You Have Questions
You have resources to turn to if you are unsure about your taxes. The IRS website has an expansive library about everything related to tax law and taxpayer responsibilities, including how to pay and file, deadlines, getting refunds, credits and deductions, and penalties. You can also find any IRS form in PDF format online. These resources can help you meet your tax obligations.
The best thing to do when hit with a negligence penalty is to evaluate your situation and take action as soon as possible. You’ll have to pay the penalty and your complete tax bill if you don’t have options for relief; otherwise, you will build up additional fees and interest.
You can also speak with an experienced tax attorney who will be able to tell you if contesting the penalty is possible. Always stay informed and don’t ignore any communication from the IRS. Failing to respond will only hurt your situation.
Contact Silver Tax Group for Tax Penalty Help
The IRS negligence penalty is serious but preventable if you’re very careful when filing your taxes. Take the time to correctly prepare and submit your tax return and always be completely honest, and you can avoid any financial implications due to inaccuracies or missed deadlines.
Remember that you may be able to get the IRS to lower or remove the amount or set up a payment plan to pay your tax bill over time. Turn to a tax professional when you’re worried about receiving a penalty or you’ve already received a notice.
The legal professionals at Silver Tax Group are ready to help you succeed no matter what tax issue you’re facing. We help with tax penalties, tax return preparation, audits and audit defense, emergency tax services, general consulting, and much more. We can also advise you on whether you should set up a payment plan or apply for penalty relief. Reach out to Silver Tax Group to speak to a tax expert about the IRS negligence penalty.
