What is a negligence penalty?

On Behalf of | Jan 27, 2021 | tax law | 0 comments

Doing your taxes is a stressful yearly endeavor for some. This is especially true for individuals who have complex income, housing or family situations among other contributing factors. The more you have to keep track of, the higher your likelihood of making a mistake.

Unfortunately, making a mistake on your taxes often comes with a heavy cost. For example, you may face a negligence penalty that leaves you in a tough financial position.

When will the IRS give a negligence penalty?

The Balance takes a look at some of the penalties the IRS imposes for tax-related issues. If the IRS changes your return to state that you owe more taxes, this is an accuracy penalty. There are two types: substantial understatement and negligence.

The IRS often charges a negligence penalty for overstatement of deductions or underreporting income. But you can end up with a negligence penalty for a number of reasons, some of which have nothing to do with the amount you pay. A few include:

  • Not having records to support tax return items when under audit
  • Not including income from information statements like 1099-MISC
  • Not making reasonable attempts to confirm you are really entitled to exclusion, credit or deduction

The IRS will determine whether someone has committed tax negligence on a case by case basis.

What is the penalty?

If facing a negligence penalty, it is 20 percent of the amount you underpaid. This is often a steep amount and an unexpected financial hit that can wipe out more than you can afford to lose. For this reason, many taxpayers facing negligence penalties seek legal guidance before making their next move.