You Can’t Make Tax Stuff Up: A Look at the Civil Fraud Penalty

Civil Fraud PenaltyThe Internal Revenue Code provides for penalties to deter taxpayers from underreporting their income, claiming bogus deductions, and engaging in other forms of misbehavior. For example, there is a twenty percent accuracy-related penalty that applies when a taxpayer negligently fails to follow regulations, materially understates his tax liability, or files a return with a substantial valuation misstatement. I.R.C. § 6662(a). That twenty percent penalty can be doubled if the return rests upon a gross valuation misstatement. I.R.C. § 6662(h).

For taxpayers who cross the line dividing negligent behavior from willful misconduct, there is a seventy-five percent fraud penalty. I.R.C. § 6663(a).… Read More