There are at least two kinds of inaccuracies or mistakes that occur with tax returns and documents filed with the IRS: willful lies and non-willful errors. The IRS fully grasps that lies and mistakes happen. To address these situations, the IRS applies accuracy-related penalties
According to the IRS, two common penalties assessed to taxpayers include:
Penalties that relate to disregarding or simply failing to follow the rules when preparing tax returns. This can include not checking your math, not bothering to include requested information, or neglecting to include basic information, such as additional income listed on a Form 1099.
If you intentionally understate your tax liability by 10% of what is actually owed, or $5,000, whichever is greater, you could be hit with an accuracy-related penalty.
It is always a mistake for the filer to assume the IRS will not cross-check submitted figures with information from other sources. Improved technology, automation, and artificial intelligence generally favor the IRS.
When the IRS identifies a significant accuracy-related issue on your return, you will receive a notice of the penalty. For either disregard of the rules or understatement of income, the penalty is 20% of the portions attributable. Interest is also added and compounds daily until the balance is paid.
These penalties can trigger the IRS to take a closer look at several years of tax returns, business filings, payroll tax records, offshore bank account reporting, or other financial disclosures. The thinking is, if you are comfortable with lying on your annual tax return, similar situations may exist elsewhere.
The difference between discussions about civil mistakes and possible tax crimes fall along the line of intent. If you receive an audit notice following an accurate penalty notice, and you know you have something to hide, consider consulting an experienced criminal defense tax attorney. Similarly, if you are already involved in an IRS audit and aware of other accuracy-related problems with your personal or business returns, and the examiner pauses your review, that may be an appropriate time to seek legal advice.
A little lie on a tax return can sometimes turn into something much bigger. To better understand red flags and the differences between civil tax problems and criminal tax matters, see our resource, "Will I Be Charged with Criminal Tax Fraud?" The key takeaway is that attempting to reduce your tax liability through inaccurate reporting can carry long-term consequences.
If you need straightforward, experienced legal advice regarding allegations of tax fraud or notices from the IRS, contact Robert J. Fedor, LLC. We serve clients internationally and in Northeast Ohio, Chicago, and New York City from our offices in Cleveland and Chicago.