Penalties are assessed when a taxpayer fails to file their income tax return on time, and if necessary, fails to pay taxes on time. Where someone cannot complete income tax returns by the normal due date, usually April 15, they may request to have the due date extended for up to six months. However, they still must still pay an estimate of the taxes they owe by April 15. Additionally, if the estimate is less than what that person actually owes, then there may be penalties for failure to pay taxes in full.
What Is the Penalty for Failure to File a Tax Return?
If an income tax return cannot be completed on time, and an extension is not requested, then that individual will be assessed a penalty of 5% of their tax liability per month for up to 5 months.
What Is the Penalty for Failure to Pay Taxes?
If taxes are not paid on time, then a penalty of 0.5% of that person's tax liability per month will be assessed. The total penalty, however, cannot exceed 25% of their tax liability.
Is There a Defense to Avoid Paying These Penalties?
1) Inability to Pay - Laying a foundation that the taxpayer is in fact unable to pay may give them a jury instruction to this defense. Forgetting to pay and giving ones assets away, or paying other bills first but having the initial finances to pay a tax bill will not be sufficient to meet this defense.
2) Negligence or Failure to Pay Was Not Willful - If a taxpayer can show that the failure to file and to pay taxes was due to reasonable cause and not willful neglect, then penalties may be waived. Generally, it is usually not enough to show that the person acted in good faith or was ignorant. The tax payer needs to demonstrate that they have exercised ordinary business care and judgment but still failed to file or to pay taxes on time, or that they will suffer an undue hardship for doing so. Reliance on an expert's opinion may be used as a defense against the penalties, but such opinion must be based on sufficient relevant facts that the taxpayer discloses to the expert.
Do I Have to Pay Penalties If I Have Filed for Bankruptcy?
It depends. Bankruptcy courts have equitable powers to abate tax penalties entirely, but not to reduce them. So, the courts can either completely remove these liabilities or allow them to be imposed on the bankrupt taxpayer.
Do I Need an Attorney?
Tax laws are complex and change frequently. Although there are various tax preparation programs on the market, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure about your tax penalties or you need someone to represent you before the IRS, a tax lawyer can help.