Many taxpayers think they can save taxes by not paying or underpaying their tax liabilities. What they do not realize is that they may be imprisoned, and the penalties and interests imposed may exceed the tax saved. The IRS commonly has taxpayers pay interest and penalties in additional to the tax owed rather than sending them to jail. The most common penalties imposed by the IRS are: 1) tax evasion penalties; 2) underpayment of tax liabilities; and 3) failure to file return penalties. More than one penalty may be imposed on a taxpayer depending on the situation.

A penalty up to 75 percent on the tax owed is imposed when a taxpayer intentionally evades tax by underpayment of tax liabilities or non-filing of tax returns. The worst offense against the IRS is tax evasion, which means the non-filing of tax returns and the underpayment of tax liabilities are intentional and not resulting from mistakes. The IRS also has the discretion to refer a taxpayer to criminal prosecution for tax evasion.
When the underpayment of tax liability is a result of carelessness, a penalty of 20 percent is imposed on the unpaid tax liability. Defenses may be available to remove this penalty depending on the reasons of carelessness. However, relying on a tax adviser is not a defense to carelessness.

A failure to file tax returns or to make payment of tax owed on the due date triggers a 5 percent per month to the maximum of 25 percent penalty on the amount of tax due.

Penalties are incorporated in tax laws to deter tax evasion and to encourage voluntary compliance and tax planning. Tax planning is essential, therefore, to saving taxes allowed under the laws while minimizing tax penalties and interest and the possibility of imprisonment.

If you have questions about your tax responsibility, consult with your tax adviser, call the IRS at 1-800-829-1040, or visit the IRS website at www.irs.gov.

(Attorney Victoria Tran is an associate at Bay Oak Law Firm.)