Penalty for Failure to Report Income on Tax Return

Percentage penalties from the IRS can be significant.

Percentage penalties from the IRS can be significant.

All income must be reported to the Internal Revenue Service on an annual tax return. If you fail to report income on your return, you could be subject to a number of penalties specified in the tax code. However, if you are able to persuade the IRS that you had good reason for failure to report income, or you didn’t understand what needed to be reported, you may be able to get the penalty waived.

Civil Crimes Vs. Criminal Crimes

Penalties under the IRS tax code are divided into two types: civil and criminal. A civil penalty will usually incur -- in addition to taxes owed -- a penalty and interest. Criminal penalties could mean being tried in a court of law and, based upon the verdict, fines and/or jail time.

Civil Crimes

Civil penalties would result if, for example, you understated the taxes you owe, file a false claim for a credit or refund, file late, file an inaccurate return, or fail to provide your Social Security number. Civil penalties can be high, such as that for filing late, which is 5 percent for each month the return is late, but limited to a maximum of 25 percent. If the arithmetic on your return is wrong, the IRS will recalculate it for you. If you owe taxes, you may have to pay a penalty, especially if it can be demonstrated that you underpaid because you ignored the rules, you significantly understated your income, or you did not disclose foreign financial assets. If you are required to pay a penalty, it could be as high as 40 percent, depending upon the source of the income.

Criminal Crimes

Criminal charges may include fraud, total disregard for the tax code, tax evasion, willfully not filing a tax return or paying taxes due, and preparing a tax return that contains statements known to you to be false and then filing that statement. Penalties for fraud can be as high as 75 percent of the amount of taxes due.

Fines and/or Jail Time

Because the IRS will prepare returns for taxpayers who do not file them, it will be hard to escape taxes, interest and penalties. Bills will be sent to the delinquent taxpayer. Generally the IRS does not move forward with a criminal prosecution if the taxpayer shows good faith in filing before he receives a notice that he is under investigation. However, if a taxpayer frequently flouts the system, a criminal investigation could lead to charges, conviction and incarceration.


About the Author

Diane Stevens' professional experience started in 1970 with a computer programming position. Beginning in 1985, running her own business gave her extensive experience in personal and business finance. Her writing appears on Orbitz's Travel Blog and other websites. Stevens holds a Bachelor of Science in physics from the State University of New York at Albany.

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