What Is the Difference Between IRS Assessed Penalties and Deficiency Penalties?

 Posted on May 01, 2024 in Tax Audits

Dealing with the IRS can be stressful even in the best of situations. The requirement to pay taxes can cause financial difficulties for taxpayers, and the possibility of making mistakes on tax returns or other tax forms may lead to issues such as tax audits, as well as the requirement to pay penalties or interest. Because of the complexity of tax laws and the many opportunities for errors, understanding the best ways to address these issues can be difficult. It is important to understand the difference between assessed penalties and deficiency penalties. An experienced attorney can help taxpayers navigate the complexities of tax laws, appeal incorrect assessments, determine when penalty abatement may be available, and address other tax-related concerns.

What Are Assessed Penalties?

Assessed penalties are imposed by the IRS for failure to comply with tax laws, including failures to file foreign informational returns such as Forms 3520, 3520-A, 5471, and 5472, or failure to report foreign bank and financial accounts. These penalties are typically calculated automatically by the IRS based on internal IRS penalty schedules. 

In addition to international information return penalties, continuation penalties will apply until the correct, complete forms are filed. Taxpayers may request that penalties be removed if they can demonstrate reasonable cause for failing to meet their requirements. Penalties may also be disputed if taxpayers disagree with the amount they owe. However, taxpayers must follow the IRS’s internal dispute procedures, and they do not have the right to challenge the assessment of these penalties in the U.S. Tax Court.

What Are Deficiency Penalties?

A taxpayer may owe a deficiency penalty if the amount of taxes paid to the IRS is less than what they should have paid. Typically, after conducting an audit and determining that taxes are owed, the IRS will send a deficiency notice to the taxpayer. This notice will inform the taxpayer of the adjustments that the IRS is proposing to the taxpayer’s tax return or other tax forms.

In some cases, a deficiency notice may detail the specific penalties that the taxpayer will be required to pay, while in others, it may only specify the amount of taxes that are due. A deficiency notice will not specify the interest that will be owed on any late payments. The final bill, which will include the full amount of taxes owed, as well as any applicable penalties and interest, will be sent at a later date.

A deficiency notice provides the taxpayer with the opportunity to agree to or dispute the IRS’s findings. If the taxpayer agrees, they may pay some of the amount owed right away, or they may wait until the IRS sends a bill. If the taxpayer does not agree, they have the right to petition the U.S. Tax Court for redetermination. This petition must be filed within 90 days of the date the notice was sent by the IRS. For taxpayers living outside the United States, the deadline is extended to 150 days. It is important to note that no payment is required on a petitioned liability, but interest will continue to accrue if the liability is upheld by the U.S. Tax Court.

How an Attorney Can Help

Due to the complexity of tax laws, tax audits, and IRS penalties, taxpayers may be unsure of the best steps to take to minimize the amounts they may be required to pay to the IRS. At John D. Teter Law Offices, our experienced tax lawyer can review the accuracy of deficiency notices and assessed penalties. We can provide guidance on whether it is best to pay the amounts requested by the IRS or appeal the findings of an audit. If necessary, we can provide representation in U.S. Tax Court, working to reduce or eliminate penalties and protecting a taxpayer’s financial interests.

Contact a San Jose Tax Lawyer

If you have received a deficiency notice from the IRS, are facing a tax audit, or are concerned about potential tax penalties, you do not have to navigate these challenges alone. Contact the San Jose, CA tax attorney at John D. Teter Law Offices by calling 408-866-1810 and schedule a consultation. With our understanding of tax laws and IRS procedures, we can help you resolve your tax conflicts and mitigate penalties and interest that may be owed.