Page 23 - 2020 Publication 17

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
• Worthless security. See Pub. 550. Penalties Accuracy-related penalty. You may have to
• Foreign tax paid or accrued. See Pub. 514. pay an accuracy-related penalty if you under-
The law provides penalties for failure to file re- pay your tax because:
• Net operating loss carryback. See Pub. turns or pay taxes as required. 1. You show negligence or disregard of the
536. rules or regulations,
• Carryback of certain business tax credits. Civil Penalties 2. You substantially understate your income
See Form 3800. If you don't file your return and pay your tax by tax,
• Claim based on an agreement with the IRS the due date, you may have to pay a penalty. 3. You claim tax benefits for a transaction
extending the period for assessment of You may also have to pay a penalty if you sub- that lacks economic substance, or
tax. stantially understate your tax, understate a re- 4. You fail to disclose a foreign financial as-
portable transaction, file an erroneous claim for
Processing claims for refund. Claims are refund or credit, file a frivolous tax submission, set.
usually processed 8–12 weeks after they are or fail to supply your SSN or ITIN. If you provide The penalty is equal to 20% of the underpay-
filed. Your claim may be accepted as filed, dis- fraudulent information on your return, you may ment. The penalty is 40% of any portion of the
allowed, or subject to examination. If a claim is have to pay a civil fraud penalty. underpayment that is attributable to an undis-
examined, the procedures are the same as in closed noneconomic substance transaction or
the examination of a tax return. Filing late. If you don't file your return by the an undisclosed foreign financial asset transac-
If your claim is disallowed, you will receive due date (including extensions), you may have tion. The penalty won't be figured on any part of
an explanation of why it was disallowed. to pay a failure-to-file penalty. The penalty is an underpayment on which the fraud penalty
usually 5% for each month or part of a month
Taking your claim to court. You can sue for a that a return is late, but not more than 25%. The (discussed later) is charged.
refund in court, but you must first file a timely penalty is based on the tax not paid by the due Negligence or disregard. The term “negli-
claim with the IRS. If the IRS disallows your date (without regard to extensions). gence” includes a failure to make a reasonable
claim or doesn't act on your claim within 6 attempt to comply with the tax law or to exercise
months after you file it, you can then take your Fraud. If your failure to file is due to fraud, ordinary and reasonable care in preparing a re-
claim to court. For information on the burden of the penalty is 15% for each month or part of a turn. Negligence also includes failure to keep
proof in a court proceeding, see Pub. 556. month that your return is late, up to a maximum adequate books and records. You won't have to
The IRS provides a direct method to move of 75%. pay a negligence penalty if you have a reasona-
your claim to court if: Return over 60 days late. If you file your ble basis for a position you took.
• You are filing a claim for a credit or refund return more than 60 days after the due date, or The term “disregard” includes any careless,
based solely on contested income tax or extended due date, the minimum penalty is the reckless, or intentional disregard.
on estate tax or gift tax issues considered smaller of $435 or 100% of the unpaid tax. Adequate disclosure. You can avoid the
in your previously examined returns, and Exception. You won't have to pay the pen- penalty for disregard of rules or regulations if
• You want to take your case to court instead alty if you show that you failed to file on time be- you adequately disclose on your return a posi-
of appealing it within the IRS. cause of reasonable cause and not because of tion that has at least a reasonable basis. See
When you file your claim with the IRS, you willful neglect. Disclosure statement, later.
get the direct method by requesting in writing Paying tax late. You will have to pay a fail- This exception won't apply to an item that is
that your claim be immediately rejected. A no- ure-to-pay penalty of 1 /2 of 1% (0.50%) of your attributable to a tax shelter. In addition, it won't
tice of claim disallowance will be sent to you. unpaid taxes for each month, or part of a month, apply if you fail to keep adequate books and re-
You have 2 years from the date of mailing of after the due date that the tax isn't paid. This cords, or substantiate items properly.
the notice of claim disallowance to file a refund penalty doesn't apply during the automatic Substantial understatement of income
suit in the U.S. District Court having jurisdiction 6-month extension of time to file period if you tax. You understate your tax if the tax shown
or in the U.S. Court of Federal Claims. paid at least 90% of your actual tax liability on on your return is less than the correct tax. The
Interest on refund. If you receive a refund be- or before the due date of your return and pay understatement is substantial if it is more than
cause of your amended return, interest will be the balance when you file the return. the larger of 10% of the correct tax or $5,000.
paid on it from the due date of your original re- The monthly rate of the failure-to-pay pen- However, the amount of the understatement
turn or the date you filed your original return, alty is half the usual rate (0.25% instead of may be reduced to the extent the understate-
whichever is later, to the date you filed the 0.50%) if an installment agreement is in effect ment is due to:
amended return. However, if the refund isn't for that month. You must have filed your return 1. Substantial authority, or
made within 45 days after you file the amended by the due date (including extensions) to qualify
return, interest will be paid up to the date the re- for this reduced penalty. 2. Adequate disclosure and a reasonable ba-
fund is paid. If a notice of intent to levy is issued, the rate sis.
Reduced refund. Your refund may be reduced will increase to 1% at the start of the first month If an item on your return is attributable to a tax
beginning at least 10 days after the day that the
by an additional tax liability that has been as- notice is issued. If a notice and demand for im- shelter, there is no reduction for an adequate
sessed against you. mediate payment is issued, the rate will in- disclosure. However, there is a reduction for a
Also, your refund may be reduced by crease to 1% at the start of the first month be- position with substantial authority, but only if
amounts you owe for past-due federal tax, state ginning after the day that the notice and you reasonably believed that your tax treatment
income tax, state unemployment compensation demand is issued. was more likely than not the proper treatment.
debts, child support, spousal support, or certain This penalty can’t be more than 25% of your Substantial authority. Whether there is or
other federal nontax debts, such as student unpaid tax. You won't have to pay the penalty if was substantial authority for the tax treatment of
loans. If your spouse owes these debts, see you can show that you had a good reason for an item depends on the facts and circumstan-
Offset against debts under Refunds, earlier, for not paying your tax on time. ces. Some of the items that may be considered
the correct refund procedures to follow. are court opinions, Treasury regulations, reve-
Effect on state tax liability. If your return is Combined penalties. If both the failure-to-file nue rulings, revenue procedures, and notices
penalty and the failure-to-pay penalty (dis-
changed for any reason, it may affect your state cussed earlier) apply in any month, the 5% (or and announcements issued by the IRS and
income tax liability. This includes changes 15%) failure-to-file penalty is reduced by the published in the Internal Revenue Bulletin that
made as a result of an examination of your re- failure-to-pay penalty. However, if you file your involve the same or similar circumstances as
turn by the IRS. Contact your state tax agency return more than 60 days after the due date or yours.
for more information. extended due date, the minimum penalty is the Disclosure statement. To adequately dis-
smaller of $435 or 100% of the unpaid tax. close the relevant facts about your tax
Chapter 1 Filing Information Page 19