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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.)
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