Penalties for a Mistake on Federal Taxes

Penalties for a Mistake on Federal Taxes
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What happens if you mess up your taxes because you made a mistake on a tax return? Is there a penalty for filing the wrong status? If so, what are the fines for an incorrect tax return? The answer to all these questions is: it depends on what you did and why.

When you file your federal income tax return, your goal should be to submit an accurate return to the IRS without having to file amended forms. Despite your best efforts, however, mistakes can happen.

If you have made an honest mistake on a tax return, you may be required to pay any additional sum of money required by the IRS in addition to a late payment penalty. If you have committed tax fraud, however, more serious penalties will likely be coming your way.

Making Mistakes vs. Committing Fraud

The IRS knows that individual taxpayers make mistakes when filing their tax returns. The agency examines returns to distinguish between mistakes made by error and mistakes that are part of an attempt to commit tax fraud.

A mistake on an income tax return could include the following situations:

  • The Social Security number on the tax return is incorrect
  • Computation error on a paper return
  • Numbers from Forms W-2 or 1099 are transcribed incorrectly
  • Taxpayer received additional W-2 or 1099 forms after filing an income tax return
  • Income tax return doesn’t have necessary schedules or documents attached
  • Attempting to claim deductions for the wrong tax year
  • Making a claim for expenses without receipts

On the other hand, tax fraud is a different situation entirely and tax evasion penalties can be severe. It occurs when taxpayers deliberately try to avoid paying their fair amount of income tax. In cases of tax fraud, the IRS must prove it occurred. Some examples include:

  • Failing to file a tax return
  • Under-reporting income earned
  • Over-reporting expenses deducted from income
  • Claiming nonexistent dependents

Tax Return Mistake Penalties

If you make a mistake on your federal taxes, you may have to pay two types of penalties. Any additional taxes that you owe must be paid along with a penalty because they were not paid on time.

The IRS charges a separate penalty if you didn’t file your income tax return on time. The position was slightly different in 2020, as coronavirus tax relief legislation postponed most federal tax filing and payment deadlines, and the extension applied automatically to all tax payers. And it will also be the case in 2022, for Hurricane Ida’s victims across six states.

The penalty for late payment is ​5 percent​ of the unpaid taxes, per month, after the original due date. Interest grows until the tax bill is paid. By law, the maximum amount the IRS can charge for interest is ​25 percent​ of the tax bill.

When the return is ​more than 60 days​ late, you are charged a penalty for late filing. The IRS charges a minimum penalty of ​$210, whichever is less. So, if you owe less than $210, you are charged the full amount of your unpaid federal income tax as the penalty for late filing.

The IRS calculates the penalty for late filing as up to ​5 percent​ of the amount of unpaid taxes per month to a maximum of ​25 percent​ of the amount owed. If you owe late payment and late filing penalties, the maximum amount you are charged is ​5 percent​ of the amount owed per month.

When You Find Mistakes

If you make a mistake on your income tax return and it involves calculations, the IRS will probably correct the mistake for you. In a situation where documents or schedules are missing, the IRS sends a letter that asks for the missing paperwork.

You can request that the IRS amend your federal tax form if you realize you made a mistake on your return. Send an IRS Form 1040X, Amended US Individual Income Tax Return, by regular mail to the IRS and include the original federal tax form you are amending along with the previously filed forms or schedules that the IRS must update due to the changes.

If it's a 2021 tax return, the IRS offers a electronic filing option for amendments. You can use commercial tax filing software for this purpose to make corrections with minimal errors. That’s because you will fill in details based on a question-and-answer format, which is simpler.

Penalty Relief for Reasonable Cause

The IRS considers penalty relief in instances where a taxpayer does not pay the tax that is due because of what the IRS categorizes as "reasonable cause." This may include death, serious illness, incapacitation, natural disaster, and other reasons listed on its website.

The taxpayer is required to supply supporting evidence of the reasonable cause. If approved, the IRS removes the penalty, but interest accrues on any unpaid tax until it is paid.