If you’ve failed to meet your tax obligations, you generally will owe tax on the full amount of the deficiency dating back to the due date for payment. Even worse: The IRS may impose certain penalties, plus interest, on the back taxes. As shown in a new case, Jananagelo Jr., TC Summ. Op. 2026-8, 8/27/26, a taxpayer’s level of sophistication may affect the determination of penalties.
Background: The IRS charges penalties for reasons relating to the timeliness of tax return filings and inaccuracies and omissions. For instance, the charges may stem from a failure to pay the full amount of tax that is owed. Typically, you will receive a notice in the mail from the IRS that will provide details about the deficiencies, including any penalties.
The list of potential penalties is a lengthy one but following are several of the most common occurrences.
- A failure-to-file penalty if you don’t file your tax return by the due date. The penalty is 5% of the unpaid taxesfor each month the return is late up to a maximum of 25%.
- A failure-to-pay penalty if you don’t pay the tax you owe by the due date. The penalty is 0.5% of your unpaid taxes for each month the debt is unpaid up to a maximum of 25%.
- Accuracy-related penalties if you don’t claim all your income or improperly claim deductions or credits. The accuracy-related penalty is 20% of the portion of the underpayment of tax attributable to negligence or disregard of rules or regulations or other fraudulent actions.
- An erroneous claim for a refund or credit penalty if you submit a claim for refund or credit of income tax for an excessive amount and reasonable cause does not apply.
- Underpayment of estimated tax if you don’t pay estimated tax accurately or on time. The rate is set quarterly by the IRS. (It is currently 7%.)
Depending on the situation, the IRS may have discretion to hand out some of these penalties or to cut unknowing taxpayers some slack.
Facts of the new case: The taxpayer, a resident of Nevada, filed joint tax returns for 2018 through 2021. He was employed full-time as an IRS revenue agent and had served in that capacity for about two decades. In addition, the taxpayer was licensed to practice law in New York and provide CPA services in Nevada.
The IRS disallowed various miscellaneous expense deductions, including employee business expenses, claimed by the taxpayer in the tax years in question. (These deductions have since been eliminated.) The Court found that the expenses were not reasonable and “ordinary and necessary” business expenses. But the disallowance was a relatively simple issue for the Tax Court to address. Much of its 32-page decision was devoted to a discussion of penalties.
Based on the taxpayer’s professional experience and expertise in federal income tax matters, the Court had no hesitation is imposing penalties for fraud, including a 20% accuracy-related penalty. This “pretty sophisticated” taxpayer should have known better and probably did.
Moral of the story: Pay attention to your own house. The IRS may look at aggressive deductions claimed on your return as being suspicious in nature based on your background.
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Tags: Income Taxes, IRS, tax court, tax penalties, Taxes
