IRS negligence penalty: what is it and what to do?

The IRS negligence penalty is reserved for those taxpayers who submit their taxes in an improper way or, more commonly, for those that have underpaid their tax bill. The penalty usually comes after a tax audit by the IRS. If you happen to receive a tax negligence penalty and don’t know what to do, the easiest way to sort out the issue is by contacting one of the best tax relief companies and having them help you. However, you can also understand the penalty and why it was applied and take some steps to avoid it. In this article, we will provide you with all the information you might need to do so.

What is the IRS negligence penalty?

If you happen to overstate your deductions or fail to report your full income on your tax return, you might be looking at a negligence penalty. The penalty itself will be as high as 20% of the amount you underpaid on your tax return, though it may vary on a case-by-case basis, depending on the specific charges.

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For example, many people fail to understand the correlation between garage sales and income tax. However, failing to understand something for the first time is worlds apart from deliberately making a mistake on your tax return. If you’ve made an honest mistake, there’s a good chance that the IRS will rescind the penalty. There are numerous situations in which you might receive the penalty, such as:

  • You don’t have records to support your deductions
  • Your tax return does not include income from information statements, such as Form 1099-MISC
  • You have “too good to be true” deductions on your tax return, and you haven’t made a reasonable attempt to confirm them

Furthermore, there is a difference between “proposing the penalty” and “assessing the penalty”. What this means is that the IRS will first propose the penalty, meaning that you will have a chance to contest it. If you don’t contest it, however, the penalty goes to the assessment stage and will be much harder, if not impossible, to contest.

person sitting behind a laptop and another person writing behind the laptop trying to figure out IRS negligence penalty
There is a world of difference between a proposal and an assessment.

The IRS negligence penalty can result from various types of negligence. It is in your best interest to understand these types, as that will provide you with the knowledge to protest the penalty before you have to deal with an official assessment.

Different types of negligence

The fact of the matter is that the tax system in the U.S. is incredibly complicated, and everyone makes mistakes from time to time. The IRS is fully aware of this and will usually be lenient on first-time offenders. Here are some of the most common types of situations that can lead to the IRS negligence penalty:

  • Unreported/underestimated income
  • Inaccurate representation of your tax situation
  • Not keeping adequate tax records
  • State tax negligence
  • Withholding information from the IRS
  • Previous history of noncompliance

Since the negligence penalty comes as a result of a tax audit, you might want to minimize the chances of being audited in the first place. Do note that you can never completely eliminate them, as audits are made on a random basis. However, if you follow all the ways to avoid a tax audit, this chance becomes almost insignificant (less than 1%). Therefore, you should do all in your power not to “stick out” in the eyes of the IRS.

Now, let’s take a look at the different negligence types and how they may lead to the negligence penalty.

Unreported/underestimated income

As a taxpayer, you usually have multiple sources of income every given year. It is very important that you report each income source that you had access to during the tax year. This includes virtually any income that you might have earned, such as your salary, part-time income, freelance income, capital gains, investments, sales, and any contract-based income.

The more sources of income you have, the more important it is to start filing your taxes on time. If you have problems meeting the filing deadline, you can always read up on last minute tax filing tips and optimize the filing process. The IRS looks very favorably on people that file their taxes on time, and any single-time inaccuracies might not warrant a negligence penalty. If you keep making the same inaccuracies, however, you can expect the IRS to come knocking at your door.

IRS negligence penalty documentation, a magnifying glass on a notebook, a pen, and a laptop
You need to be very careful when reporting your income, lest you risk an IRS negligence penalty.

Inaccurate representation of your tax situation

Due to the fact that there are so many tax credits and deductions to take advantage of, many people fail to accurately report their tax situation. For example, let’s say that you want to utilize some of the tax breaks for single parents. If you don’t really know what you are doing, chances are that you will make a mistake when filing your tax report. You may not have read the qualifying criteria but have still applied for tax breaks, creating tax negligence and risking a negligence penalty.

Not keeping adequate tax records

Every time you file your taxes, you are required to include all the documentation that proves you qualify for tax relief. Furthermore, you will need to include information from the previous tax years, as well as any relevant income information (such as W-2, for example). Again, this might not be a problem unless the IRS decides to audit you. However, by not providing adequate tax records, your chances of being audited will skyrocket.

Therefore, the best thing to do is to be very diligent in updating your documentation, especially if you are utilizing many of the popular tax deductions available to you. The more deductions you try to claim, the more you need to worry about pertinent documents.

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State tax negligence

Your federal tax return is not the only thing that you need to be concerned about. It is also possible to receive the IRS negligence penalty by failing to provide the necessary information on your state taxes. This will trigger a state audit which may be followed by a federal audit. If you get to a federal audit, there are good chances that you will be issued a negligence penalty.

person holding money next to the U.S. flag
The IRS is not the only one that can audit you.

Withholding information from the IRS

As you might imagine, withholding information is one of the worst “crimes” against the IRS. Therefore, it is never a good idea to withhold any tax information. There are two ways in which you might inadvertently withhold information: By choice or by not providing your tax preparer with enough information. You may also have been overzealous in wanting to cut your tax bills and simply forgot about key information. Again, if this is your first offense, you may be let “off the hook” for the time being. You might not want to count on that, however, and always try to be as accurate with your information as possible.

Previous history of noncompliance

While not exactly something that you can correct presently, your history of noncompliance significantly increases the chances of an audit and the subsequent IRS negligence penalty. You can’t do anything about your history, however, so you might want to be extra careful when preparing any future tax returns. The best thing to do in this case is to hire a professional tax consultant to help you prepare your taxes. Just make sure that you provide your consultant with all the relevant information. If you have a history of non-compliance, you can’t really afford to make any more mistakes.

Negligence is not a fraud

There is a clear distinction between negligence and fraud. While you may feel that you’ve committed a serious crime by being negligent, what matters is the intent. It is perfectly fine to make a mistake but what is not fine is to willfully misrepresent your information. Tax fraud is a federal crime that may lead to up to $100,000 in fines or imprisonment. Tax negligence only accounts for 20% of the underpaid amount. However, there’s a chance that your negligence becomes tax fraud under the following circumstances:

  • You falsely explain your underreported or omitted income
  • You create a verbal misrepresentation of facts
  • You conceal sources of income
  • You claim false deductions
  • You falsify tax records

Basically, you don’t ever want to willfully lie to the IRS. Making a mistake is one thing but lying about it is a whole other thing. It is usually best to simply admit your mistake and “eat” the penalty than it is to try and avoid it and risk tax fraud.

wooden scrabble blocks spelling out "truth will set you free"
It is usually best to speak the truth.

However, receiving the IRS negligence penalty is not definite. There are things you can do that can make the IRS rescind the penalty altogether. They do not work in every case, of course, but they will provide you with the best chance of avoiding the penalty.

What can you do about the IRS negligence penalty?

If you do end up with the IRS negligence penalty, there are a couple of things that you can do, including:

  • Contest the penalty
  • Show that you made an effort to comply
  • Get professional tax help

Your first “warning sign” of a negligence penalty will come with a CP200 Notice of Underreported Income. As soon as you receive the notice and you think you don’t deserve the penalty, you need to start doing something about it. Let’s see what your options are.

Contesting the penalty

Usually, the best option at your disposal is to simply contest the penalty. To do so, you will need to contact the IRS directly. You will then need to argue your case. Here are some of the ways in which you may be able to avoid the penalty:

  • You argue that you’ve made an isolated mathematical mistake when preparing your taxes
  • You argue that you received inconsistent information or misunderstood the IRS instructions
  • You argue that the information you’ve received from your broker, employer, or any other income source was incorrect
  • You argue that your tax professional was responsible for the mistake
person looking at a document
Contesting the IRS negligence penalty might be your best recourse.

The last argument might be a bit more complex, though. If you argue that your tax professional is responsible, you will need to provide documentation as proof. Furthermore, there’s a legal precedent that states that the responsibility for your tax obligations rests upon you. It is also your responsibility to protect yourself from common IRS tax scams. However, this is still a case that you can win if you have appropriate documentation.

Again, do note that under no circumstances do you want to lie to the IRS. Doing so opens you up for tax fraud charges.

Showing that you’ve made an effort to comply

People make mistakes; that’s how the world works. Due to this fact, there is a good chance that you can avoid the penalty by showing an effort to comply and file an accurate tax return. You may argue that your mistake was due to unforeseen circumstances, bad advice from the IRS, incorrect information statements, or a simple misunderstanding.

If you want to maximize your chances of avoiding the IRS negligence penalty, you will want to include as many details and influencing factors that led to the penalty and which were out of your control.

Getting professional tax help

The fact of the matter is that avoiding the negligence penalty can be extremely complex. If you can’t make a simple case, it is usually best to turn to tax professionals. Your tax advocates can help you in a variety of ways, from referencing the applicable tax law, requesting nonassertion, and preparing your argument.

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However, finding the best tax professionals may be harder than you might think. The best thing to do is search for tax advocates that specialize in the IRS negligence penalty, of course. The easiest way to find such professionals is to browse the Consumer Opinion Guide. If you happen to need any additional information concerning taxes, tax tips, tax relief options, or anything else that is related to taxes, this is the best place to do so!

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