10-Compliance Responsibilities

Question 1

A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000.
On what amount would the penalties for late filing and late payment be computed?

Answer 1

$5,000

The late filing and late payment penalty is based upon the balance due. $50,000 owed less $45,000 withheld = $5,000 net due.

Question 2

An accuracy-related penalty applies to the portion of tax underpayment attributable to
I. Negligence or a disregard of the tax rules or regulations.
II. Any substantial understatement of income tax.

Answer 2

Both I and II

The accuracy-related penalty applies if any portion of an understatement if tax on a tax return is due to negligence or to substantial income tax understatements, income tax valuation misstatements, estate or gift tax understatements, or pension liability overstatements. This response correctly indicates that the accuracy-related penalty applies in cases of negligence. However, this response incorrectly implies that the penalty does not apply when a taxpayer’s income tax has been substantially understated.

Question 3

Edge Corp., a calendar-year C corporation, had a net operating loss and zero tax liability for its 2019 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first-quarter 2020 estimated income tax payment using the:

Annualized income method, or

Preceding-year method

Answer 3

Annualized income method - yes
Preceding-year method - no

Corporations owing $500 or more in income tax for the tax year are required to make estimated tax payments or be subject to an interest penalty. The payments must be equal to the lesser of 100% of the tax liability for the current year (i.e., the annualized income method) or the preceding year (i.e., the preceding-year method). The payments cannot be based on the preceding year if: (1) the corporation did not file a return showing a tax liability for that year (e.g., the corporation experienced a net operating loss); (2) the preceding year was less than 12 months; or (3) the corporation had taxable income of over $1,000,000.
This response incorrectly indicates that the Edge Corp. could not use the annualized income method for calculating its estimated tax payments. Firms can always use the annualized income method to calculate their estimated tax payments because there are no restrictions on the use of the method. This response also incorrectly indicates that Edge Corp. could use the preceding year’s tax liability as a basis for calculating its current-year estimated tax payments. Edge Corp. cannot use the preceding year’s tax liability because the corporation experienced a net operating loss during that year and, as a result, there was no tax liability.

Question 4

Which, if any, of the following could result in penalties against an income tax return preparer?
I. Knowing or reckless disclosure or use of tax information obtained in preparing a return.
II. A willful attempt to understate any client’s tax liability on a return or claim for refund.

Answer 4

Both I and II

Disclosure or use of the information on a tax return can only be done with the written consent of the taxpayer. Absent the taxpayer’s written consent, disclosure or use of the taxpayer’s tax return information by a tax preparer makes the preparer subject to a penalty for knowingly or recklessly disclosing tax return information. Penalties also may be imposed on income tax preparers that willfully attempt to understate the tax liability on a return or refund claim.
This response correctly indicates penalties may be imposed against preparers that willfully attempt to understate any client’s tax liability on a return or claim for refund. However, this response incorrectly implies that penalties may not be imposed on preparers that knowingly or recklessly disclose or use of tax information obtained in preparing a return.