You get a notice from the IRS that you’ve been negligent on your taxes—yikes! What do you do now?
IRS negligence means you’ve either underpaid what you owe in taxes or improperly submitted your tax return. If you underpay, you may be charged a penalty in the amount of 20% of your unpaid taxes.
While no one wants to get a negligence penalty, there are strategies you can take to contest it. In this article, we’ll walk you through the ins and outs of negligence so you can better understand your situation and argue your case.
What is IRS Tax negligence?
When the IRS performs an audit on your tax return, they’ll often issue a tax negligence penalty. This usually means you have underpaid your taxes and will now have to pay up to 20% of the amount of taxes you still owe, in addition to paying your taxes in full. This is how the IRS ensures that everyone pays a full tax.
What is an audit?
To understand what negligence is, it may help to know more about what an audit is. In an audit, the IRS reviews an individual’s or business’ tax information to make sure everything has been reported correctly and accurately. This usually happens to businesses; it’s pretty rare for an individual to be audited, although it can happen.
The IRS sometimes performs random audits, but you may also be audited if the IRS finds anything on your tax return suspicious. You can be audited for things like failing to report additional income from a side job or withholding money made on investments from your taxes.
Types of negligence
There are different types of negligence. Here are the various things that may cause you to incur a penalty.
- Inaccurately reporting your taxes: for example, if you state that you qualify for certain deductions and credits when you don’t
- Failing to report all income: if you fail to list a certain source of income or fail to report the full amount of your income
- Failing to keep accurate records: if you fail to include relevant information from both this and past tax years, including things like a W-2 and adequate documentation for any tax relief you’re claiming
- Failing to keep business records: if a business fails to keep and report records of all taxable transactions
- Withholding information: if you withhold information from the IRS or from your tax preparer
- Being noncompliant in the past: if you have been negligent in the past, your chances of being audited and penalized are higher; this also holds true if you’ve been negligent on your state tax return, which may lead to a federal tax audit
Obviously, you don’t want to be audited by the IRS. That’s why it’s important to double check your taxes and ensure you’re not leaving anything out before you file.
What’s the difference between negligence and fraud?
Tax negligence is often unintentional. It can be easy to forget a certain source of income or accidentally misrepresent your finances. Tax fraud, on the other hand, means you have been intentionally negligent, and may lead to an investigation.
But before you start wondering if you’re going to be locked up for tax fraud, take it easy. Unless you really have intentionally misrepresented your taxes, you likely don’t have to worry. Even then, the IRS likely won’t open an investigation unless you’ve deliberately lied to the IRS or committed fraud multiple times in your tax return.
What’s the penalty for negligence?
While you likely won’t have to worry about being arrested for tax fraud, negligence carries its own set of troubles. In addition to the 20% penalty, you may face additional consequences, including:
- Failure to file fee: if you don’t file your taxes by the deadline, the IRS may charge up to 5% per month of your taxes still owed, up to 25% maximum, in addition to your taxes still owed
- Late filing fee: if you file your taxes after the deadline, you’ll be subject to a penalty of either $435 or 100% of your taxes owed, whichever is less (this is in addition to the failure to file fee above)
- Failure to pay fee: if you file but fail to pay, the IRS will charge you a monthly fee of 0.5% of your taxes owed, up to 25% maximum, increasing to 1% a month if, 10 days after receiving a notice from the IRS, you still have not paid. The IRS may also charge interest, compounded daily, on your remaining balance.
What to do if you receive a tax negligence penalty
So much for what constitutes negligence and how you’ll be penalized—what should you do if you actually are accused of tax negligence?
First of all, you’ll probably receive a notice from the IRS (CP200 Notice of Underreported Income) stating that you have been negligent and are subject to a penalty.
At this point, you have the option to contest the penalty by contacting the IRS—and this is something you should do immediately. The longer you wait, the more complicated things will get.
You may be able to contest your penalty if you can argue that:
- You simply miscalculated when adding up your income or applying deductions
- An employer or other source of income supplied you with incorrect information
- You received inconsistent information from the IRS or misunderstood the instructions
- The tax professional who prepared your return made a mistake (this may not excuse you, however, as responsibility for a tax return rests with the individual taxpayer)
In contacting the IRS, make it clear that any mistake on your part was unintentional, that you prepared your tax return to the best of your abilities but simply made a mistake due to one of the conditions above. Give as much evidence and supporting documentation as you can, and keep track of every message between you and the IRS as the process unfolds.
While getting a negligence notification from the IRS can be scary, it’s important to remain calm and do your best to contest the claim if you simply made an honest error in filing your taxes. And if you need help navigating the process, reach out to a member of the TaxGlobal community. We’re always here to help!