The IRS imposes penalties for a variety of transgressions. A penalty is imposed if a return is either not filed or filed late. A penalty is imposed if 25% or more of income shown on a return is understated. A penalty is imposed for failing to include items or income or overstating items of deduction. The IRS is quite creative and relentless in imposing and collecting penalties.
Relief from or abatement of penalties is possible, though not automatic, nor a bargaining chip in settlement efforts. A taxpayer must demonstrate that the circumstances giving rise to the penalty were due to “reasonable cause” and not “willful neglect” of the taxpayer. Careful presentation of the facts and circumstances surrounding the cause for the penalty is essential to obtaining relief, and for a variety of other reasons.