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Penalties for Non-Reporting Income to the IRS

Penalties for Non-Reporting Income to the IRS

The IRS requires that all income be reported on a tax return, and failure to comply can result in fines and sometimes penalties. However, most penalties and fines can be waived if you can convince the Internal Revenue Service that you had reasonable grounds for not reporting the income and did not understand that you had to report this income on your return. Criminal penalties only apply to people who do not declare income and know that they are hiding something.

Note: If you fail to report your income to the IRS or knowingly under report your income, you could be charged with various crimes or face severe tax penalties.


Tax Return Accuracy

Your tax returns must be accurate, which means they must reflect all the money you earned in the tax year that you are required by law to report. Employees who receive tips must report all tips to their employer. Undeclared tips can result in a 50% penalty on mandatory social security, health insurance, and railroad pension contributions because the employer has not withheld the required amount. The IRS adds a 20% penalty if you underpay your tax by not reporting income. You may face the Accuracy Penalty if: you are negligent or ignorant of IRS rules, claim tax benefits for a false transaction, you "substantially" underpay less than you owe in taxes, or fail to disclose a foreign asset.


Understanding Tax Fraud

Failure to report income may result in the IRS imposing a fraud penalty. The fraud penalty is 15% for each part of the month the tax return is late due to fraud, up to a maximum of 75%. There is a second fraud fine of 75% for paying significantly less than the tax due for fraud. There is also a $5,000 fine if the IRS determines that you filed a frivolous tax return that contains substantially unreported income.


Penalty or Fines for Missed Payments Due to Failure to Report

Failure to file a tax return with the IRS will also result in penalties because you have essentially missed a payment and are facing a late payment penalty. The IRS charges a failure to file a penalty of 5% for each part of the month the refund is overdue, up to a maximum of 25%. Once the return is 60 days late, there is a penalty: the lesser of $135 and unpaid taxes. The IRS also charges a non-payment penalty of 0.5% of the unpaid tax for each part of a month the tax is not paid.


Interest on unpaid taxes

Interest is charged on all unpaid taxes when due. It is also charged if you get an extension. Certain penalties, including those for impracticality, accuracy, and fraud, accrue interest from the date the tax is due. Other penalties do not accrue interest until notice is received from the IRS.

The Internal Revenue Service requires that all income be reported on a tax return, and failure to do so can result in fines and sometimes penalties. However, most penalties can be waived if you can convince the IRS that you had reasonable grounds for not reporting the income and did not understand that you had to report this income on your return. Criminal penalties only apply to people who do not declare income and know that they are hiding something.


Tip: If you fail to report your income to the IRS or knowingly under report your income, you could be charged with various crimes or face severe tax penalties.

Other Criminal Sanctions

Deliberate failure to file a tax return with the IRS can result in more severe penalties than simple fines; the IRS can prosecute you for criminal penalties. The IRS generally charges taxpayers with tax evasion, willful failure to file a return, willfully submitting incorrect information, willful failure to pay the correct amount of tax, filing a fraudulent return, and preparing a fraudulent declaration. If the IRS pursues a criminal investigation based on the fraudulent activity, the defendant could face up to 5 years in prison and fines of up to $250,000, depending on the charges.


Dispute a penalty

You can appeal the fine if you disagree with the amount you owe.

Call the toll-free number at the top right of your letter or notice, or write a letter to the IRS explaining why they should reconsider the sanction. Sign and send the letter with supporting documents to the address indicated in your notice or letter.

Have this information available when you call or send your letter:

  • For each penalty, an explanation of why you think the IRS should remove it

  • The notice or letter you received

  • The sanction you want the IRS to reconsider


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Tiffany Gaskin
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