Final answer:
False. The IRS can impose a 20% penalty for negligence or disregard of rules and a 75% penalty for tax fraud. These penalties serve to promote tax compliance and deter both careless errors and intentional fraud.
Step-by-step explanation:
False. While the Internal Revenue Service (IRS) does impose penalties for mistakes and fraudulent activities on tax returns, the specific percentages you've mentioned are not accurate. The IRS may indeed charge penalties, but they vary based on the nature and severity of the error or fraud. For a simple mistake, which is defined as negligence or disregard of the rules but without intent to defraud, the IRS can impose a penalty of 20%. This is to encourage compliance and discourage carelessness when filing taxes.
On the other hand, tax fraud, which involves intentional wrongdoing with the aim of evading tax owed, carries a much heftier penalty. The penalty for fraud is typically 75% of the underpayment that is attributable to the fraudulent activity. Tax fraud is a serious offense and carries not only financial penalties but also the possibility of criminal prosecution, which can result in imprisonment.
Free riding on taxes is when individuals or businesses underreport their income or claim excessive deductions to lower their tax liability illegally. This is detrimental to the Treasury's revenue and requires the government to spend more on monitoring and enforcement to maintain the integrity of the tax system. The IRS has a broad range of tools at its disposal to address non-compliance, including audits, penalties, and criminal charges in case of fraud.
In terms of likelihood of being audited by the IRS, historically, high-income individuals faced more scrutiny. However, in recent years, audit rates have declined due to fewer resources being allocated to enforcement. Nevertheless, all taxpayers are advised to comply with tax rules, as the potential financial and legal consequences of non-compliance can be significant.