Underreporting Income to IRS Penalties | 20/20 Tax Resolution (2024)

FAQs

What happens if IRS discovers unreported income? ›

If a discrepancy exists, a Notice CP2000 is issued. The CP2000 isn't a bill, it's a proposal to adjust your income, payments, credits, and/or deductions. The adjustment may result in additional tax owed or a refund of taxes paid.

To avoid the substantial understatement penalty by adequate disclosure, you must properly disclose the position on the tax return and there must at least be a reasonable basis for the position. To properly disclose the position, complete and attach IRS Form 8275 to your tax return and disclose all relevant facts.

You may qualify for penalty relief if you demonstrate that you exercised ordinary care and prudence and were nevertheless unable to file your return or pay your taxes on time. Examples of valid reasons for failing to file or pay on time may include: Fires, natural disasters or civil disturbances.

Reasonable cause

The IRS will consider this relief when the taxpayer can show they tried to meet their obligations, but were unable to do so. Situations when this could happen include a house fire, natural disaster and a death in the immediate family.

Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.

It may cause an increase or decrease in your tax liability or may not change it at all. If your tax liability increases and you now owe money, it is to your benefit to pay the balance as soon as possible, because the IRS charges interest until you pay the balance in full.

Send us a payment or pay your taxes in full to stop future penalties and interest from adding up.

We may be able to remove or reduce some penalties if you acted in good faith and can show reasonable cause for why you weren't able to meet your tax obligations. By law we cannot remove or reduce interest unless the penalty is removed or reduced.

Taxpayers with assessed taxes of $100,000 or more are not eligible for automatic relief and can apply for penalty relief under the reasonable cause criteria or the First-Time Abate program. Visit IRS.gov/penaltyrelief for details. Taxpayers can find details about their penalty relief by viewing their transcript.

One-time forgiveness, otherwise known as penalty abatement, is an IRS program that waives any penalties facing taxpayers who have made an error in filing an income tax return or paying on time. This program isn't for you if you're notoriously late on filing taxes or have multiple unresolved penalties.

How to write a tax penalty waiver letter? ›

IRS Letter to Request First-Time Penalty Abatement. To Whom It May Concern: We respectfully request that the [failure-to-file/failure-to-pay/failure-to-deposit] penalty be abated based on the IRS's First Time Abate administrative waiver procedures, as discussed in IRM 20.1. 1.3.

Waiver of Penalty. If you have an underpayment, all or part of the penalty for that underpayment will be waived if the IRS determines that: In 2022 or 2023, you retired after reaching age 62 or became disabled, and your underpayment was due to reasonable cause (and not willful neglect); or.

Penalties eligible for One-Time Penalty Abatement include: Failure to File - You did not pay by the due date of the tax return and did not file your tax return by the extended due date. Failure to Pay - You did not pay the entire amount due by your payment due date.

How to qualify for a first-time penalty abatement. If you meet two criteria, you might be able to get the IRS to reverse its penalties for not filing a tax return or paying on time. You must have filed a tax return for at least three years prior to when you got a penalty if you were required to.

The negligence penalty is 20% of the amount you underpaid

This is a steep penalty, and the IRS usually charges it (or, “assesses” it) when taxpayers overstate their deductions or don't report all their income. Negligence is defined under the law as any failure to make a reasonable attempt to comply with the tax laws.

The IRS continues to identify people who have a filing requirement but have failed to file a return. By law the IRS may file a substitute return for you if you do not voluntarily file. A series of letters is first sent explaining the possible action IRS may take as part of the Substitute for Return Program.

If an auditor finds you haven't reported all of your income and aren't entitled to all credits, deductions, and exemptions claimed on your tax return, you might face a bigger tax bill, penalties, interest, and in rare and serious cases (such as fraud or tax evasion), jail time.

First and most importantly is that the under reporting of income including not reporting cash transactions to avoid taxes is not legal. The IRS actively pursues businesses who under report income and who pay in cash to avoid income taxes.