Let’s face it…tax penalties can be excessive. They can turn a reasonable tax bill into an astronomical obligation. IRS penalties and interest assessments are designed to get your attention and make you want to pay your liability before it gets even larger.
The general definition of a penalty is a punishment, a payment for not fulfilling a contract, or the painful consequences of an action or condition. Most IRS penalties result from the inaction (which is in itself a type of action) of the taxpayer.
The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion. You may be assessed a penalty for failing to file your return and pay your taxes on time. Penalties may also be charged if you substantially understate your tax liability, understate a reportable transaction, file an erroneous claim for refund or credit, file a frivolous tax submission, or provide fraudulent information on your return.
Let’s take a look at the top 10 U.S. expat penalties:
- Filing late. A failure-to-file penalty may be assessed if you do not file your return by the due date (including extensions). Additional penalties may be assessed if you file more than 60 days late or if your failure to file is due to fraud. If you can show that you failed to file on time because of reasonable cause and not because of willful neglect, you should not have to pay the penalty.
- Late FBAR. Although the IRS has relaxed the penalties, they still can be high.
- Paying tax late. If your taxes are not paid by the due date, you will be charged a failure to pay penalty. If a notice of intent to levy or a notice and demand for immediate payment is issued, the penalty rate increases.
- Failing to make appropriate estimated tax payments. If you receive income from which taxes are not withheld, you must make estimated tax payments in a sufficient amount and on the correct schedule, or you may have to pay a penalty.
- Providing inaccurate information. If you underpay your tax because you substantially understate your income tax or show negligence or disregard of the rules and regulations, you may have to pay an accuracy-related penalty. The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law, to exercise ordinary and reasonable care in preparing a return, or failure to keep adequate books and records.
- Filing an erroneous claim for refund or credit. You may have to pay a penalty if you file a claim for a refund or credit that is disallowed.
- Filing a frivolous tax submission. Frivolous tax returns or other submissions are subject to a penalty of $5,000. A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.
- Civil fraud. If any underpayment of tax on your return was due to fraud, a civil penalty of 75 percent of the underpayment will be added to your tax debt.
- Failure to supply your social security number (SSN). If you do not include your SSN or the SSN of another person where required on a return, statement, or other document, you are subject to a penalty of $50 for each failure. This penalty also applies if you do not provide your SSN to another person or entity that needs it for a return, statement, or other document.
- Bouncing a check to the IRS. If you pay your taxes with a check and the check bounces, the IRS may impose a penalty.
U.S. expat tax penalties
U.S. expat tax penalties are certainly a serious matter and should not be taken lightly. So what is the best way to avoid them? Two things – education and commitment. Just understanding what the penalties are and how they work is most important. Next, you will need to make a commitment to understanding the law get your taxes filed and your payments made timely. If you can master these two things you will sleep better at night.