When filing your tax returns, the IRS holds you responsible for the information provided and expects it to be accurate. Whether you do your returns yourself or hire a tax professional to prepare the returns for you, there are significant consequences if the information is not accurate and complete. Therefore, it is of utmost importance that if you are preparing your own tax returns, that you have a keen and thorough knowledge of current tax codes or you hire someone who does. Accuracy related tax penalties can add a considerable amount to your tax debt.
Accuracy Related Tax Penalties
Accuracy related tax penalties (better known as Accuracy Related Penalties) will be assessed by the IRS if they find errors on your tax return. If there are errors on your tax return and the IRS sends you a bill with a penalty, this is a good thing. The only other alternative if there are errors on your tax return is that the IRS believes you intentionally filed your returns with errors to lower your tax liability. This would be considered fraud. Tax fraud is a felony and carries a consequence of up to five years in jail and/or a $250,000 fine ($500,000 for corporations.)
If the IRS believes your inaccuracies are unintentional, the penalty is much lower. Generally, the penalty is 20% of the difference between the original tax debt that you are responsible for with the original filing, and the tax debt that you are responsible for after the errors are corrected. However, the penalty can go as high as 40% (in the event of gross valuation misstatements, meaning you misstate the value of one of your properties by 150% or more.)
For example; you file your returns with errors and a tax liability of $15,000. You are audited and the IRS finds errors that, once corrected, brings your tax liability to $20,000. If you don’t have any gross valuation misstatements, you will be charged a penalty of 20% of the difference, which in this example would be $5,000.
Accuracy related penalties include IRS negligence penalties, intentional disregard penalties, substantial understatement penalties, substantial valuation misstatement penalties, substantial overstatement of pension liabilities penalties, substantial gift or estate tax valuation understatement penalties and understatements related to listed or reportable transactions penalties.
Accuracy Related Tax Penalty Abatements
You may disagree with the conclusion the IRS comes to. Maybe the IRS believes you made an error but you have a reason for reporting on your tax return the way you did. Maybe you contacted the IRS for help with preparing your returns and you were given bad advice by the IRS employee. Maybe you hired someone to prepare your tax returns and the error is on their part. You have the opportunity to present this explanation to the IRS. If they agree, many times, they will reduce or even remove the penalties altogether. Your choice is to pay the full liability that the IRS claims you owe and then present your case asking for a refund of the extra liability paid or you can present your case before paying the full liability and then asking for the penalty abatement. The latter option tends to be risky as the IRS will also be charging interest on the liability owed while your case is being reviewed.
For most taxpayers, it is appropriate to hire a reputable tax firm to get help with the accurate filing of tax returns. If you find yourself facing accuracy related penalties because your tax firm was not reputable or you filed the returns yourself, it is also wise to hire a tax professional.
With their finger on the pulse of the IRS procedures and tax codes every day, it is easier for Enrolled Agents to quickly and accurately assess your options and help you obtain the best results that you qualify for with the IRS. While you may be able to resolve the issue on your own, it could take longer and lackluster results may be achieved.