The IRS wants taxpayers to do the right thing on their tax returns and has an arsenal of penalties to enforce correct behavior. I thought it would be useful to list what I thought the IRS cares most about by a hierarchy of sins based on the level of penalties imposed starting with number 5 and going to the biggest sin.
5. Making a mistake. In this case usually no penalty is imposed at all.
4. Paying your taxes late is a .5% penalty per month on the unpaid balance.
3. Overstating expenses will get you a 20% underpayment penalty (accuracy related penalty).
2. If you don't report income reported to you on a 1099 or W-2, you are subject to a 30% penalty on the understatement amount. The IRS calls this a reportable transaction.
1. The biggest sin of all is not filing a tax return. The late filing penalty is 5% of the unpaid balance for each month the return is late up to 25%. The willful failure to pay tax or file a return is subject to a maximum fine of $25,000.
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