Penalty for Failure to Report Income on Tax Return

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 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 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.

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.