By Coleman Jackson, Attorney & Certified Public Accountant
June 21, 2018
The Internal Revenue Code is full of various kinds of penalties that the Internal Revenue Service is authorized to assess and collect from errant, indifferent, negligent, ambivalent, and indecisive or otherwise noncompliant taxpayers who fail to collect or pay their tax bill or attempt to evade the federal tax laws. Six IRS penalties that seem to be common in recent years are as follows:
Code Sec. 6672 Penalties: penalties assessed when taxpayers fail to timely collect, turn over withholding taxes or avoid timely payment of tax obligations;
Code Sec. 6701 Penalties: penalties assessed against tax return preparers, such as enrolled agents, certified public accountants or others working in the tax return preparation services industry who aids and abet taxpayers in filing false or fraudulent tax returns;
Code Sec. 6676 Penalties: penalties assessed against taxpayers and others who file tax refund claims or take tax credits without basis in reality, truth or facts. Unsubstantiated deductions and credits on a tax return commonly give rise to Code Sec. 6676 penalties. Filing a tax return with the IRS with a false refund request constitutes a false statement under the penalty of perjury.
Code Sec. 6697-6699 Penalties: penalties for failure to file various types of tax returns that should be filed. Such as failure to file a Form 1040, Form 1120, Form 1120S or Form 1165 can all be the basis for the IRS to assess a failure to file penalty. Pass through entities, such as, partnerships and s-corporations must still file entity tax returns even though federal taxes are paid at the individual ownership level rather than the entity level.
Code Sec. 6712 Penalties: penalties assessed against taxpayers who fail to disclose treaty based tax positions. Immigrants, expatriates and foreigners are especially susceptible to incurring faulty tax treaty position penalties unless they hire well qualified tax consultants in preparation of their annual tax returns.
Code Sec 6662 Penalties: penalties assessed against taxpayers who fail to report income from foreign sources, such as, foreign bank accounts, foreign businesses, and foreign asset holdings can incur very severe penalties. U.S. citizens, resident aliens and certain nonresident aliens must report worldwide income from all sources including foreign bank accounts, foreign businesses, foreign trusts and other foreign assets. Moreover, taxpayers with foreign holdings whose aggregate value exceeds $10,000 at any point during the calendar year must file Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Financial Crimes Network (FinCen’s BSA E-Filing System). Failure to report the existence of offshore holdings is subject to civil and criminal penalties. It is anticipated that this set of penalties and potential criminal prosecution will be on the rise in the near future because the IRS has announced that it will end the 2014 Voluntary Disclosure Program on September 28, 2018.
Another special set of tax rules have long been in force to forgive tax penalties due to reasonable cause and good faith. The reasonable cause relief is set out in Code Sec. 6664. The IRS will not impose accuracy related penalties upon a showing by the taxpayer that there was reasonable cause for the tax position and that they acted in good faith with respect to the tax position or act in question. The reasonable cause defense under Code Sec. 6664 turns on all the facts and circumstances. That simply means that the IRS and Courts try to determine ‘why’ the taxpayer failed to comply with the federal tax laws. A taxpayer’s substantial knowledge of federal tax law is a significant factor that the IRS and Courts consider in determining whether a taxpayer acted in good faith and reasonable. Immigrants or those recently immigrating to the U.S. often lack the sophistication and knowledge of U.S. tax laws. U.S. tax laws complexity often confounds well educated Americans as well. Taxpayers reliance on tax return preparers’ suggestions, recommendations and guidance also have been found by many Courts to meet the taxpayers burden to show that they acted reasonable and with good faith. Taxpayers exercising ordinary business care and diligence sometimes likewise are found by the IRS and Courts as acting in good faith and reasonably. These various examples simply show that the IRS can abate, forgive or waive federal tax penalties in a very broad spectrum of situations. Taxpayers confronted with IRS tax penalty situations must act reasonable and be prudent in exploring with their tax attorney the potential that the penalties can be abated, forgiven or waived. Even fraud penalties can be waived under certain circumstances and criminal charges may likewise be averted.
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.
Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432