Mistakes happen on tax returns. In some cases, the IRS will request a revision, and the taxpayer will correct the mistake. In other cases, the taxpayer may need to pay not only the unpaid taxes and interest but also a penalty.

When the IRS believes a taxpayer carelessly, recklessly, or intentionally ignored tax rules or regulations, the agency may attach a negligence penalty to the unpaid taxes. A negligence penalty is 20 percent of a taxpayer's unpaid taxes.

For example, a taxpayer underpays their taxes by $10,000. The taxpayer took several deductions and cannot provide proof of their ability to claim those deductions. If the IRS assesses a negligence penalty on top of that amount, the taxpayer would be required to pay an additional $2,000 plus any interest. Interest accrues on both the unpaid tax and the penalty.

Negligence penalties generally arise from failing to properly file taxes, not filing the correct or required documents, or improperly taking deductions or credits. Taxpayers need to be able to show they qualify for deductions and credits. If they're required to file out a form such as 1099-MISC, they can't simply guess a number without filing in the form.

Contesting a Negligence Penalty

Simply saying a mistake was innocent or accidental isn't enough to escape a negligence penalty. Taxpayers need to be able to provide evidence that they acted in good faith to comply with tax laws when filing their return.

When taxpayers receive notification of underpayment, they should be proactive in responding to the notice. If they agree that they underpaid the amount, they should pay it as soon as possible to avoid any additional interest. If they failed to file forms, they should file out the missing forms and submit them.

For substantial underpayments of taxes, taxpayers should be prepared to provide documents and other information to avoid the negligence penalty.

For example, a taxpayer worked with an accountant who told him that filing out 1099-MISC wasn't necessary. The accountant was incorrect, and the taxpayer submits that email exchange to avoid the negligence penalty.

If you have questions about tax underpayment and penalties with the IRS, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.