Negligence Penalty
The Negligence Penalty is a financial penalty imposed by the Internal Revenue Service (IRS) on taxpayers who fail to exercise reasonable care in reporting income or deductions on their tax returns. This penalty is typically assessed when a taxpayer underreports their income or claims excessive deductions due to a disregard of rules or regulations.
To qualify as negligent, the taxpayer’s actions must show a lack of effort to comply with the tax code. For instance, if a taxpayer fails to keep proper records or does not seek professional advice when uncertain about the tax implications of a transaction, this may result in a negligence penalty.
The penalty can amount to 20% of the understated tax due to negligence. For example, if a taxpayer incorrectly deducts $10,000 in expenses that should not have been claimed, leading to a $2,000 understatement of tax due, the IRS may impose a negligence penalty of $400 (20% of $2,000).
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