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Penalties for not reporting income to IRS

Penalties for not reporting income to IRS

The IRS expects that all income be reported on an income tax return and may otherwise result in financial penalties and sometimes criminal penalties. However, most penalties can be waived if you can convince the IRS that you have a reasonable reason for not reporting income and did not understand that you should have reported that income. Criminal penalties only apply to people who do not declare income and know they are hiding something.

If you are engaged in an audit or have received an IRS CP2000 notification, you may also be penalized if the IRS changes your tax return and says you owe more taxes. This punishment is called the accuracy penalty.

There are two kinds of accuracy penalties that many see in CP2000 audits and notifications:

  • Penalty for negligence

  • Penalty for substantial underestimation 


The penalty for negligence is 20% of the wrongly paid amount.

This is a hefty penalty, and the IRS typically charges it when taxpayers overestimate their deductions or fail to report all income. Negligence is defined by law as any reasonable failure to comply with tax laws. The IRS may impose a penalty for negligence if it decides that the taxpayer's negligence or failure to comply with rules or regulations has caused an underpayment of taxes.

Based on the IRS's specific changes upon your return, the IRS charges this fine on a case-by-case basis.

The IRS is likely to impose a penalty for negligence if:

  • The tax return does not include income from an information return, such as the 1099-MISC form.

  • You are audited and do not have documents proving the elements of your income tax return.

  • You have not made a reasonable attempt to confirm that you have the right to claim a deduction, credit, or exclusion on return, which a reasonable person would consider "too good to be true" in these circumstances.


It is best to challenge the sanction before the IRS officially assesses it.

It is a good idea to argue against a negligence sentence after the IRS proposes the sentence, but before the IRS assesses it. If you expect the IRS to formally assess the fine and file a Statutory Notice of Deficiency (usually a letter 3219), your only option will be to file your case with the U.S. tax court.

To request a "penalty non assertion," you will need to respond to the IRS and submit your case.

  • During an audit, protest the sanction when dealing with the IRS auditor. You can also appeal the penalties proposed by the IRS during an audit at the IRS appeals office. But it would be best if you still did this before the IRS can formally assess the penalty.

  • With CP2000 notices, contest the first CP2000 response penalty.


Show the IRS that you did all in your power to comply.

In the case of penalties for negligence, it is not possible to request a reduction of the sentence for the first time. The decision to apply a penalty for negligence depends on your honest and reasonable attempt to comply and make an accurate statement.

You will need to prove that you made a reasonable attempt to comply with the law, but this was impossible due to unforeseen circumstances.

Some factors in your defense can be:

  • It was based on a misinformation statement, like Form W-2, Form 1099, K-1, etc.

  • A miscalculation or isolated transcript.

  • You have the legal authority to support tax treatment (and tax status is properly disclosed, if applicable).

  • You have reasonably relied on a competent tax professional or the advice of a third party.

  • You ignored or misinterpreted the law or the facts.

  • You relied in good faith on incorrect information (for example, an incorrect basis of action presented on a brokerage statement).

  • You relied on trusted advice from the IRS.

When discussing a sanction, include as much detail as possible and provide all of the factors applicable to your situation.


How to get help

An experienced tax professional can also add a lot of value to this process, especially regarding applicable tax law and legal procedures to support your argument. Your tax advisor may also ask the IRS not to confirm the penalty for negligence.


FOR MORE INFORMATION ON THIS TOPIC OR TO MAKE AN APPOINTMENT TO SEE HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CONTACT Universal Accounting & Financial Services, INC, BY CLICKING THE BLUE TAB ON THIS PAGE.


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