You made a mistake on your taxes; will the IRS ignore it this time or levy a penalty? If there is a penalty, can you get out of it by claiming ignorance and promising to fly properly the next time?
Some of the answers may be dependent on what specific provision of tax law you violated, how it was discovered, and other factors.
Even how the penalty is calculated affects how much penalty leeway you have with the IRS.
Many people believe that if you were not attempting to cheat on your taxes, the IRS will not impose penalties.
After all, taxes are complicated, and mistakes happen. However, it is your responsibility to demonstrate that you acted reasonably. One approach is to seek professional tax advice.
If you are unable to persuade the IRS, you will almost certainly face penalties.
Penalties vary in size but are typically around 25% of the tax. However, the size of the penalties varies, and there can be wild swings in IRS penalties.
If the IRS believes you were attempting to defraud them, you could face a 75% civil penalty or even criminal prosecution.
The tax law distinguishes between non-willful and willful violations. Willfulness is defined as the voluntary, intentional violation of a known legal duty.
Failure to learn of filing requirements, combined with efforts to conceal the facts, can be interpreted as willfulness.
Repeat violations are also investigated. You might be able to explain one failure to comply with the law. However, repeated failures can morph behaviour from inadvertent neglect.
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into careless or deliberate disregard But let’s assume you’re not trying to cheat or hide anything, and that the penalties the IRS is attempting to collect aren’t malicious.
How bad can it get? A case before the United States Supreme Court demonstrates how severe penalties, even civil penalties, can be.
Which is a more reasonable IRS penalty, $50,000 or $2.72M? The United States Supreme Court has announced that it will rule on exactly this penalty spread for non-willful FBAR violations in Bittner v. the United States, No. 21-1195.
The Court is expected to rule on whether non-willful foreign bank account reporting violations apply per form or per bank account.
In 2021, the Fifth Circuit Court of Appeals ruled that Mr Bittner, a Romanian-born businessman and investor with foreign bank accounts, was liable for non-willful penalties of $2.72 million for failing to disclose his foreign accounts for five years, not $50,000, as he had calculated. United States v. Bittner, No. 20-40597 (5th Cor. 2021).
In a similar case, the Ninth Circuit ruled in favour of lower non-willful penalties, in United States v. Boyd, No. 19-55585 (9th Cor. 2021).
The Supreme Court will now make a decision. It may not be Roe v. Wade, but if you are a taxpayer, you should keep an eye on the outcome.
Is it usually possible to argue your way out of a tax penalty? Taxpayers argue that penalties are unnecessary for a variety of reasons.
One of the most common is the claim that a tax position was based on “reasonable cause.” The IRS evaluates this differently depending on which penalty was assessed.
In addition to reasonable cause, certain penalty defences involve other concepts, such as the absence of willful neglect. Isn’t that proving a negative?
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Yes, and the taxpayer must also bear this burden. Who wins in a tax penalty standoff? This one should come as no surprise. The IRS, of course, does.
To put it another way, taxpayers bear the burden of proving that they acted with reasonable cause. To report our correct tax liability, we must all use ordinary business care and prudence.
Remember that all tax returns are signed under penalty of perjury. The IRS applies a facts-and-circumstances test on a case-by-case basis to determine whether a taxpayer qualifies for the reasonable-cause exception.
However, with foreign bank account penalties — and many other ones — it can be especially difficult to get by.
