Penalties and Information Returns
An information return does not require payment of tax. An information return is defined as a type of tax form filed by employers and businesses to report wages and payments, respectively.
For example, an employer may file a Form W-2 while a business may file one or more reports using Form 1099. The penalty for failures related to these forms is a dollar amount per form not timely filed, and the amount of penalty increases with the degree of lateness.
The maximum penalty for filing a late information return is $50. Many of the information returns are filed electronically. Additional penalties for failure to file a partnership income form (Form 1065, $195 per month per partner up to 12 months maximum) apply; and for failure to file an S Corporation return (Form 1120S).
Penalties Unpaid Withholding Taxes
Employers are required to withhold both income and Social Security taxes from employee wages. The amounts are then submitted and paid to the government. The employer will incur a penalty of 100% of the amount not paid over (plus liability for paying the withheld amounts may be collected without judicial proceedings from each and every person who had custody and control of the funds and did not make the payment to the government. This rule applies to company employees, officers, individuals, and to companies themselves.
Penalties and Failure to Provide Foreign Information
Taxpayers who own shares in a controlled foreign corporation are required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
This form must be filed for each controlled foreign corporation.
The penalty for failure to file on time ranges from $10,000 to $50,000 per form. The taxpayer may also lose foreign tax credits. U.S. corporations more than 25 percent owned, directly or indirectly, by foreign persons must file Form 5472 to report such ownership and all transactions with related parties.
The use of Form 5472, Information Return of a 25 Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business is required under sections 6038A and 6038C. The penalty for failure to file Form 5472 is $10,000 per required form.
The penalty may be increased by $10,000 per month for continued failure. Penalties may also be assessed for a taxpayer’s failure to report changes in those foreign taxes used as credits.
Additional penalty restrictions apply for both U.S. citizen and resident taxpayers (including entities) who are beneficiaries of a foreign trust or make transfers of property to a foreign trust. Beneficiaries must report information about the transfer. Failure to file Form 3520 or Form 3520-A will result in assessed penalties of up to 35 percent.
A transferor to a foreign corporation must file Form 926, Filing Requirement for U.S. Transferors of Property to a Foreign Corporation. A penalty of 10 percent is typically assessed when the value of the transfer is up to $100,000.
Lastly, a penalty of $500,000 plus jail is assessed for failure to file Treasury Department Form TD F 90-22.1 each year by owners of or signatories to foreign bank or securities accounts.
Penalties and Excise Taxes
Federal excise taxes are typically imposed on goods and services. Taxes under this category may require a purchase of tax stamps or evidence of advanced payment of tax. Retailers may be required to collect the tax. Whether the entity is required to purchase tax stamps or collect the tax, the manufacturers’ and retailers’ goods and services are subject to an assortment of penalties.
In addition, there are penalties that apply that are in the form of an excise tax. Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product.
There are also excise taxes on activities, such as on wagering or on highway usage by trucks. Charities and private foundations are responsible for paying excise taxes. Lastly, penalties in the form of excise taxes may be assessed against pension and benefit plans.
 Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
 Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Section 6048(b)
 Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (http://www.treasury.gov/services/Pages/TD-F-90-22.1-Report-of-Foreign-Bank-and-Financial-Accounts.aspx).
Tax Fraud Penalties
The IRS considers the filing of a false tax return to be fraud, which is a criminal offense. Taxpayers convicted of fraud or aiding another taxpayer in committing tax fraud will be subject to forfeiture of property and/or jail time.
Taxpayers are convicted and sentenced through the court system and it is the Department of Justice that prosecutes cases within this context. The IRS does not prosecute tax fraud cases. Once convicted, the taxpayer may incur tax fraud penalties based upon the type of tax case.
In other respects, tax protesters frequently argue that the current income tax laws are not valid. In response to this argument, they tend to file frivolous terms as well as frivolous court petitions.
The IRS assesses a civil penalty for frivolous tax submissions. A person who files a frivolous return based upon the policy presented in Part 4. Examining Process, Chapter 10. Examination of Returns, Section 12. Frivolous Return Program of the Internal Revenue Manual can expect to pay a penalty of $5,000.
However, the Secretary provides for the person to withdraw his or her submission. If the taxpayer responds to the Secretary’s notice of a specified frivolous submission by withdrawing it within 30 days, “after such notice, the penalty imposed . . . shall not apply with respect to such submission” (Law.Cornell.edu, “26 USC – Frivolous tax submissions,” 9/12/2013). In essence, taxpayers that subsequently withdraw their frivolous tax submission will not incur a penalty.
Tax Adviser Penalties
Tax adviser penalties are the last types of penalties on this list. If a tax adviser promotes tax shelters, he or she can expect to incur a penalty. In addition, tax advisers who “fail to maintain and disclose lists of reportable transactions of their customers or clients for those transactions” will be responsible for paying a penalty. The penalty assessed is based upon the type of case and location — whether domestic or foreign.
Taxpayer and tax adviser penalties may be eligible for a first-time abatement depending upon the case.
 26 USC 6702 – Frivolous Tax Submissions
Owing the IRS is never a good feeling and adding penalties on top of the balance is like twisting the knife. Everybody makes mistakes and the IRS will often ease up on innocuous errors, especially if there is no history of previous tax problems. One way to avoid penalties is to take extra care when preparing your returns, even if you use an outside service.
If you owe the IRS and do not know where to turn, call me. Brotman Law has a track record of successfully representing clients before the IRS. Depending on the severity of the situation, oftentimes, we can negotiate to get the penalty abated. It is a much better option to seek professional advice than trying to go it alone with the IRS. We understand the IRS’ tactics and how to strategize to get the best results for our clients.