• Taxpayers who understate the amount of tax for which they are responsible may be penalized by the Internal Revenue Service. Any time a taxpayer lists a tax amount on his return that is less than the correct amount of tax, it's considered an understatement in tax. According to the IRS, the type and amount of the penalty to be assessed depends on both the taxpayer's intention and the amount of the understatement. The severity of the penalties vary from relatively negligible amounts to penalties that are almost equivalent to the amount of the understatement of tax.
  
  

Estimated Tax Penalty

• People who are self-employed or who are subcontractors do not have tax withheld from their checks, and as such are required to make quarterly estimated tax payments. Estimated tax payments are due April 15, June 15, Sept. 15 and Jan. 15. Taxpayers who fail to make their estimated tax payments or who understate or underpay their estimated tax will be assessed an underpayment of estimated tax penalty. The amount of the estimated tax penalty will depend on the amount of the understatement. To request a reduction or removal of the penalty, complete IRS Form 2210 (or Form 2220 for businesses) and mail it to the IRS office that processes returns for your area. If you are not sure which IRS office processes returns for your region, refer to irs.gov for a complete list.
  
  

Negligence Penalty

• Taxpayers who do not make a "reasonable attempt" to comply with IRS laws are considered negligent. Examples of negligence range from a taxpayer who neglects to file a tax return to taxpayers who include erroneous information on their returns. In the first example, the taxpayer would be guilty of negligence because he did not exercise a "reasonable attempt" to file the return in a timely manner. In the second instance, the taxpayer did not make a "reasonable attempt " to determine the lawfulness and correctness of the information included on her tax return. The penalty for negligence is 20 percent of the underpayment of tax.
  
  

Fraud Penalty

• Fraud, as defined by the IRS, is a willful attempt to evade or underpay tax. A fraud penalty is 75 percent of the underpayment that was due to fraud.
  
  

Substantial Understatement Penalty

• Any understatement of tax, regardless of the reason, which understates the correct amount of tax by more than 10 percent is considered a substantial understatement in tax and could result in the assessment of a 20 percent penalty on the underpayment.