The IRS has a formidable array of penalties to encourage voluntary compliance.
Civil Penalties
- Accuracy-Related Penalty (20%): Applies to the portion of underpayment due to negligence or strictly "substantial understatement" of tax.
- Civil Fraud (75%): If any part of an underpayment is due to fraud (intent to evade tax), a 75% penalty applies to the entire underpayment.
Criminal Penalties
Tax evasion is a felony. Consequences include:
- Up to 5 years in prison.
- Fines up to $250,000 for individuals ($500,000 for corporations).
- Costs of prosecution.
Defenses
You may avoid penalties if you can show "reasonable cause" and "good faith," such as legitimate reliance on a professional tax advisor's advice after providing them with all necessary information.