Tax penalties can add up
The average tax liability, where penalties are assessed, can climb nearly 30 percent
NEW YORK (CNNfn) -It's no secret the Internal Revenue Service wants your tax returns and it wants them on time.
But before you seal the envelope, you'd be wise to take the advice of tax professionals: double check your math and give your return one last look.
It could keep you from becoming a statistic.
"The dollar figure of tax penalties assigned each year is gigantic," said Daniel Pilla, author of eight self-help tax books, including "How to Get Tax Amnesty." "There are more than 140 different penalty provisions in the tax code, and generally we see the maximum penalty assessed."
He noted, too, that the average tax liability, where penalties and interest are assessed, is increased 2.7 times. In other words, if you are found to owe $5,000 in back taxes, chances are you'll be forced to cough up about $13,500 by the time the IRS "Christmas tree ornaments are hung," Pilla said.
Delinquency will cost you
Those who fail to file their taxes on time get hit with the heaviest load of penalties each year, according to the IRS.
Of the 20.1 million penalties (after abatements) charged against taxpayers in 1997, 11.8 million applied to late fees. That number, however, reflects multiple fines per individual, since anyone who agrees to an installment plan is charged a monthly late fee until the obligation is met.
The penalty for late payment is 0.5 percent (or half of one percent) of the balance due per month. (Beginning Jan. 1, 2000, however, the IRS will drop that penalty to one-quarter of a percent per month, part of a Congressional effort to give already-struggling taxpayers a break.)
If you refuse to pay or work out an installment agreement with the IRS, you'll be issued a levy notice, which ultimately gives Uncle Sam the right to dip into your bank account to cover your tax liability. In that case, the fine jumps to 1 percent.
You should also be aware that if your failure to file relates in any way to fraud, or a deliberate attempt to mislead the IRS, you're in deeper water still. You'll be stuck paying a flat civil penalty of 75 percent, but only for the portion of underpayment attributable to fraud.
If you are convicted of tax evasion or any other criminal activity in a court of law, the penalties and fines can skyrocket - or land you in jail.
Another common penalty applies to estimated tax withholdings. The tax collector will assess a fine for failing to withhold a sufficient amount of your income each month from your paychecks. You must have at least 90 percent of your total year's tax liability covered or have at least 100 percent of the prior year tax liability paid to avoid the fine.
"The self-employed person can't just go to the end of the year and say here's how much I owe," said IRS spokesman Don Roberts. "You are required by law to make payments during the year."
The third most common, and generally most punishing, type of civil penalty is handed down to taxpayers who refuse to file their return at all. The fine is 5 percent per month of the balance due, not to exceed 25 percent.
That's 10 times higher than the failure to pay penalty.
"It's better to file, even if you can't pay it, than not to file at all," Roberts said.
There are dozens of other miscellaneous fees and penalties to watch out for, too. (Not all apply to the individual taxpayer.)
For example, failure to include your social security number on your tax form can cost you $50. You will also face a fine if you fail to provide someone with your social security number in cases where it is required - a bank, for example.
Roberts said the fine is generally assessed only when taxpayers refuse to provide the IRS with that information. Forgetting to write the number on your tax form isn't usually enough to trigger the fine.
The IRS, however, also charges a $250 fine for failure to provide a tax shelter registration number - per offense.
And then there's the "frivolous" fine, for citing constitutional provisions previously shot down by the courts as your reason for giving the IRS less than its fair share. That'll cost you $500.
You will also face a penalty for filing an inaccurate return due to negligence or reckless disregard of rules and regulations. In the same vein, substantial understatement of your income tax are subject to fines if the understatement exceeds the greater of: 10 percent of the correct tax, or $5,000.
Accuracy-related penalties are 20 percent of the underpayment.
Getting off the hook
The IRS, however, is more forgiving than you might imagine.
If you file your return but find that you can't meet your obligations, even on an installment plan, the government will, in some cases, allow you to make an "offer-in-compromise." If the IRS accepts your offer, you'll be excused a certain portion of your tax liability, but this is often only used in extreme cases.
"Penalty rates and interest fees can be very high and before you know it you can't pay it," Brown said. "The average middle class taxpayer doesn't know about this offer-in-compromise clause."
Likewise, if you believe you've been assigned a penalty in error, or you had a reasonable excuse for failing to comply with filing requirements, let IRS officials know.
The agency will often eliminate or abate your fine if you demonstrate in good faith that the error you made was a mistake.
But Pilla said you have to handle it professionally.
"Don't ever try to do this over the phone because if you call up probably 100 percent of the time your answer will be a 'no,'" he said. "You must put it in writing, in a clear and concise statement of the facts that tie to the behavior being penalized."
Moreover, he said, back up your case with documentation, where possible. If you were in the hospital during tax filing season and weren't able to get to finished on time, send them proof - a doctor's report, for example.
And lastly, Pilla said, "don't take no for an answer."
If your request for penalty abatement is rejected, file an appeal. Citing data from the IRS, he said, roughly 80 percent of cases are resolved in favor of the taxpayer.
--by staff writer Shelly K. Schwartz