Does the IRS Forgive Honest Mistakes? (2024)

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"Forgiving" might not be the first word that comes to mind when you think of the Internal Revenue Service. However, if you make an honest error in your tax return, the IRS could spare you from any draconian penalties. Typically, the most severe penalties are reserved for tax cheats who go out of their way to defraud the government.

Minor Adjustments

If you make a simple math error, you'll be forgiven in a sense because the IRS won't take formal action against you. In fact, the IRS will usually send you a letter and automatically adjust your taxes. It can do that much without conducting an official audit. You may even end up with a larger refund or a lower tax bill. As long as you agree to the correction, as most taxpayers do, that will be the end of your involvement with the IRS for that tax return.

Substantial Understatement

While minor errors are essentially no big deal, the IRS will not be as generous if you substantially under-report your tax on your tax return. From the perspective of the IRS, you've got a problem if you understate your tax by the larger of $5,000 or 10 percent of the tax you owe. For example, if you calculate you owe $10,000, but the IRS determines you owe $18,000, you've failed to pay $8,000 in tax. The penalty is 20 percent of the amount of the understatement, which is $1,600 in this example.

Negligence

Negligence, or careless or reckless disregard of IRS rules, also carries a 20 percent penalty. Entering items on your return you can't substantiate will also trigger a penalty. The IRS will forgive your negligence if you can demonstrate you acted in good faith and there was a reason behind your claims. You usually have 30 days to lodge an appeal with the IRS regarding tax adjustments.

Fraud

The IRS draws a clear distinction between tax return errors, even those committed recklessly, and tax fraud. Only those who willfully and deliberately attempt to evade taxes are accused of fraud. Examples include providing false information to the government or hiding sources of income. Don't look for forgiveness from the IRS if you commit tax fraud. You'll be looking instead at a penalty of 75 percent of the underpaid tax and possible criminal prosecution.