Identification

• Until 1989, IRS tax code allow several penalties to apply to a single violation, but as of the time of publication only one penalty can apply to an error or falsification. As of 2011, the IRS imposes a fee of 20 percent of a worker's tax bill for under-reporting income out of negligence. In cases of fraud, the IRS charges a 75 percent penalty. However, the IRS has no specific standard for negligence and fraud, so the IRS tends to charge taxpayers with negligence for omitting income unless fraud is obvious. For instance, a person who made $100,000, but only reports $5,000 might be a good target for fraud.
  
  

Honest Mistake

• The IRS might remove a tax penalty when the taxpayer can show that he under-reported income because of an honest mistake, such as not knowing he received the income. An honest mistake cannot come from poor advice from an IRS official. If the IRS agrees that the taxpayer made an honest mistake, it only charges interest on the tax bill. The interest rate on unpaid federal tax debt is the federal short-term lending rate -- revised every three months -- plus 3 percent.
  
  

Other Penalties

• A penalty for under-reporting income does not preclude the IRS from imposing other penalties. For example, the IRS charges a penalty of 5 percent of the tax bill up to 25 percent for every month a worker does not file his return, and 15 percent per month up to 75 percent of the tax bill in cases of fraud. Overvaluation of charitable contributions and undervaluation of estate taxes carry a 40 percent penalty. Late payments carry a penalty rate of 0.5 percent of the balance every month up to 25 percent of the tax bill, according to the website WorldWideWeb Tax.
  
  

Tip

• Taxpayers can always appeal an IRS penalty. The IRS stops collection on penalties until it resolves an appeal. Citizens can cite tax court opinions, congressional reports and other high-level opinions when they appeal a penalty. The IRS has an online self-help tool to appeal the most common reasons for tax penalties, but taxpayers might want to hire someone to represent them and request a meeting with the IRS. If the taxpayer thinks the IRS has a good case for fraud, he needs to hire a criminal attorney, because he can go to jail.