The IRS charges a variety of penalties for different kinds of non-compliances. They typically will charge either a civil penalty or criminal penalty, depending upon the infraction. A civil penalty is only monetary while a criminal penalty can be monetary and include jail time. For cases such as tax fraud, the IRS can charge both civil and criminal penalties.
Penalty for Failure to Pay Taxes
Usually, the penalty charged for non-payment of taxes is 0.5%. However, it can grow to a maximum of 25% in some cases. If a taxpayer owes taxes and does not pay them by the filing deadline, the IRS begins to charge a penalty and interest on the taxes owed for the month, or part of the month the return remains unfiled. Even with an extension, taxpayers are required to pay their full tax bill before the filing deadline.
Penalty for Failure to File Tax Return
The IRS charges the penalty of 5% for non-filing of a tax return. A taxpayer is charged this penalty if s/he is required to file a return and does not do so before the filing deadline.
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty (TFRP) is charged if the person (sole proprietor, partner, corporation, or an employee of any kind of business) responsible for withholding and depositing taxes to the IRS fails to do so. This individual is personally held responsible for paying the entire amount of unpaid trust fund tax, plus interest.
The penalty can include imprisonment of not more than 5 years and/or a fine of more than $250,000 for individuals ($500,000 for corporations). The kind of taxes usually withheld and paid to the IRS are income and employment taxes, including social security taxes, excise taxes, and railroad retirement taxes.
Penalty for Underpayment of Taxes
The IRS may charge a penalty if there is understatement of income due to negligence or willful disobeying of the tax rules, substantial underpayment of taxes, or hiding of assets and/or income overseas. Also, if benefits are claimed without sufficient economic substance (a transaction that lacks meaning or purpose), the IRS can charge this penalty.
The penalty can be a fine of not more than $100,000 for individuals ($500,000 for corporations), and/or imprisonment of not more than 1 year.
Additional Penalty for Early Retirement Accounts Withdrawal
If you make an early withdrawal from your retirement account, a tax penalty of 10% is charged along with the regular income tax. If you qualify for an exception, you can get the penalty removed.
Penalty for Tax Fraud
Penalty for tax fraud is punishable by both fine and jail time. It may include a fine of not more than $250,000 for individuals ($500,000 for corporation) and/or imprisonment of not more than 3 years. Tax fraud includes providing false statements and information to the IRS in any form.