108 MCQs 1C3 - Taxpayer penalties Flashcards
A CPA’s adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods are available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty?
The annualization method
The seasonal method
Neither I nor II
II only
Both I and II
I only
I only
To avoid a penalty for underpayment of estimated tax, a taxpayer must make tax payments throughout the year either by withholding or estimated tax payments. There are several safe harbors for computing the minimum amount to pay during the year to avoid the penalty.
Under the annualization method, the safe harbor amount is computed based on the actual income and expense of the current year. There are no income limitations on the use of the annualization method. If the CPA’s income was mostly from preparing income tax returns and 75% of her income for the year was in the first four months, she might qualify for the annualization method.
There is no safe harbor method called the seasonal method.
The most common safe harbor method is to pay the lesser of 90% of the current-year tax or 100% of the prior-year tax (110% if AGI for the prior year was over $150,000).
Authorities
IRC 6654
A penalty can be imposed on a taxpayer who fails to pay a sufficient amount of estimated income tax. How is the amount of the rate determined?
The rate is adjusted quarterly, based on the 30-day Treasury bill rate.
The rate is adjusted monthly based on the federal funds rate.
The rate is set annually based on the Federal Reserve borrowing rate.
The rate floats and is determined based on the interest rate in effect at the time of the deficiency assessments.
The rate floats and is determined based on the interest rate in effect at the time of the deficiency assessments.
The penalty rate floats, as determined under IRC Section 6621, reflecting the rate of the loss of money at the time of the deficiency assessments. The IRS publishes this and other interest rates in periodic Revenue Rulings.
Authorities
IRC 6654(a)(1)
Work on this
Bass Corp., a calendar-year C corporation, made qualifying Year 4 estimated tax deposits equal to its actual Year 3 tax liability. Bass filed a timely automatic extension request for its Year 4 corporate income tax return. Estimated tax deposits totaled $7,600. This amount was 100% of the total tax shown on Bass’s final Year 3 corporate income tax return. Bass paid $400 additional tax on the final Year 4 corporate income tax return filed before the extended due date. Bass was subject to:
interest on the $400 tax payment made with tax return.
a penalty for underpayment of estimated taxes.
Neither I nor II
Both I and II
II only
I only
I only
Since Bass Corp. made estimated tax deposits equal to 100% of the total tax shown on Bass’ prior-year (i.e., Year 3) corporate income tax return, Bass will not have to pay a penalty for underpayment of estimated taxes.
A “safe harbor” provision allows no penalty to be assessed on a corporation for underpayment of estimated taxes if the estimated tax deposits equal the lesser of 100% of the current-year tax or 100% of last year’s tax.
Bass will pay interest on the $400 paid with the return, accrued from the original due date through the date of payment.
4133.02
Authorities
IRC 6601
IRC 6655(d)
Charles Moore had a $2,000 tax liability in 20X7. In 20X8, the following year, Charles expects to owe at least $1,500 in federal taxes. For 20X8, he has not withheld income taxes. Which of the following statements is correct?
Charles must file estimated taxes because his tax in 20X8 is greater than $1,000.
Charles must file estimated taxes because his withholdings are smaller than 100% of his expected tax in 20X8.
Charles does not need to file estimated taxes because his tax in 20X8 is less than his 20X7 tax.
Charles must file estimated taxes because his withholdings are smaller than 90% of his tax in 20X7.
Charles must file estimated taxes because his tax in 20X8 is greater than $1,000.
2017 - prior - 100% of $2000 = $2000
2018 - current - 90% of $1500 = $1350
He has to pay more than $1000 and he does not make payments.
In general, a taxpayer must pay estimated tax if both of the following apply:
- The taxpayer expects to owe at least $1,000 in tax for the current year after subtracting his or her withholdings and refundable credits.
- The taxpayer expects his or her withholdings and credits to be less than the smaller of 90% of the tax to be shown on the current-year tax return or 100% of the tax shown on the prior-year tax return.
In this case, Charles satisfies both tests. He expects to owe $1,500, which is greater than $1,000. In addition, his withholdings of $0 are less than the smaller of $1,350 (90% of $1,500, which is the expected tax for the current year) or $2,000, which is 100% of his prior-year tax liability.
IRS Publication 17, Publication 505
Filing IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, gives you:
an extension of time to pay the amount of taxes due.
a 6-month extension to file the tax return.
a penalty-free period of 6 months if you cannot pay the taxes due by the filing date.
no interest on the amount due from the original due date of the return, which for most taxpayers is April 15.
Authorities
IRS Publication 17
a 6-month extension to file the tax return.
If a taxpayer cannot file his or her tax return by the due date, the taxpayer may generally get an automatic 6-month extension of time by filing IRS Form 4868. However, failure to pay the tax due by the regular due date (generally, April 15) will result in the taxpayer owing interest on the tax liability and could, technically, also result in penalty charges for failing to file the return when due. The IRS rarely pursues that as a stand-alone charge.
If the Internal Revenue Service is forced to seize an individual’s weekly paycheck in order to pay past-due taxes owed by the individual, the individual has the legal right to keep an amount of weekly income equal to:
the amount determined by reference to published IRS guidance.
the current federal hourly minimum wage amount times 40.
the individual’s weekly salary times 1/2.
the individual’s weekly salary times 1/3.
the amount determined by reference to published IRS guidance.
If the Internal Revenue Service is forced to seize part of an individual’s weekly pay, the individual has the legal right to keep an amount of weekly income determined from IRS Publication 1494, Tables for Figuring Amount Exempt from Levy on Wages.
For example, a single man with no dependents may keep $266.35 per week. A married man with three dependents, filing a joint return, may keep $803.83 per week.The Internal Revenue Service (IRS) follows specific rules and guidelines when seizing an individual’s wages to satisfy past-due taxes through a process called a wage garnishment. These rules are outlined in the Internal Revenue Code, specifically in Section 6334(c), and they determine how much of an individual’s weekly income can be exempt from wage garnishment.
The correct answer is:
The amount determined by reference to published IRS guidance.
The IRS publishes guidelines that specify the amount of an individual’s income that is exempt from wage garnishment based on their filing status and the number of dependents they have. These guidelines are regularly updated, and they take into account the individual’s standard deduction and the federal poverty guidelines. The exempt amount may vary from case to case, and it’s essential to consult the most current IRS guidance or seek professional tax advice if facing wage garnishment.
Authorities
IRC 6334(d)(2)(A)
If a taxpayer files a claim for a refund that is greater than the amount actually allowable, what is the percentage of the penalty of the improperly claimed amount?
15%
10%
25%
20%
20%
A penalty equal to 20% of the improperly claimed amount applies if a taxpayer files a claim for a refund that is greater than the allowable amount. The penalty does not apply if the taxpayer can show a reasonable basis for the excessive refund claim.
Authorities
IRC 6676(a)
Interest on a tax deficiency begins to accrue on the date on which
A The tax was due, without regard to extension of time to file.
B The tax was redetermined by the IRS upon audit.
C A court decision was entered in favor of the IRS.
D A notice of levy was mailed to the taxpayer.
The tax was due, without regard to extension of time to file.
Interest on tax deficiency must be paid from the tax filing due date without regard to an extension until the tax deficiency is paid off completely.
One of the accuracy-related penalties for taxpayers is for negligence or disregard of rules and regulations. The penalty is a percentage of the underpayment. What is that percentage?
25%
20%
10%
15%
20%
The accuracy-related penalty combines several related penalties so that multiple penalties will not apply to a single understatement of tax.
Each of the accuracy-related penalties is 20% of the portion of the tax underpayment attributable to (1) negligence or disregard of rules and regulations, (2) substantial understatement of tax liability, (3) substantial valuation overstatement, or (4) substantial valuation understatement. The penalty will not apply if the taxpayer can show a reasonable basis for the position that was taken on the return.
Authorities
IRC 6662(a-b)
Sam’s Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of Year 3 estimated tax payments that Sam can make?
$30,000
$33,000
$45,000
$50,000
$33,000
General Safe Harbor Rule: To avoid any penalty for underpayment of estimated taxes, the taxpayer must pay in 100% of the prior-year tax paid or 90% of the current-year tax due.
Special Safe Harbor Rule: If the taxpayer had taxable income in the previous year in excess of $150,000, then the safe harbor for avoiding underpayment penalties is 110% of the prior-year tax.
For Year 3, the safe harbor for Sam is to pay in $33,000 ($30,000 × 1.10). Since Sam had taxable income of $175,000 for Year 2, this exceeds the $150,000 rule, so he would have to use the special safe harbor rule.
Sue must make estimated tax payments of $4,000 for the tax year. She makes the following payments:
1st Payment—credit of $1,000 from her previous-year refund
2nd Payment—$500 on April 20
3rd Payment—$500 on May 31
4th Payment—$1,000 on August 15
5th Payment—$500 on October 15
6th Payment—$500 on December 30
Which of the following statements is correct?
She has not made timely payments because her second and third payments were not made by April 15.
She has not made timely payments because her fourth payment was not made by June 15.
She has made timely estimated payments.
She has not made any timely payments because none of the payments were made by the required IRS schedule.
She has made timely estimated payments.
For estimated tax purposes, the tax year is divided into four payment periods for taxpayers that are required to make estimated tax payments. Each period has a specific payment due date and if the taxpayer does not pay enough tax by the due date of each of the payment periods, then a penalty may be charged even if the taxpayer is due a refund when the income tax return is filed. The specific payment dates for estimated tax payments are April 15, June 15, September 15, and finally January 15 of the following year. Each payment is equal to one-quarter of the total estimated payment.
In this case, Sue made at least a $1,000 payment ($4,000 ÷ 4 periods) by each payment date. Hence, she has made timely estimated payments.
Authorities
IRS Publication 17
What is the maximum fine (criminal penalty) for an individual taxpayer for willful attempt to evade or defeat tax?
$50,000
$250,000
$500,000
$100,000
The maximum penalty for willfully attempting to evade or defeat tax is a $100,000 fine and/or five years in prison for an individual taxpayer. For a corporation, there is no imprisonment, but the maximum fine is $500,000.
Authorities
IRC 7201
What is the penalty if fraud is the reason for failure to timely file?
A penalty of 25% per month (with a maximum of 75%) of the deficiency on the tax return (when filed)
A penalty of 20% per month (with a maximum of 50%) of the deficiency on the tax return (when filed)
A penalty of 15% per month (with a maximum of 75%) of the deficiency on the tax return (when filed)
A penalty of 10% per month (with a maximum of 50%) of the deficiency on the tax return (when filed)
A penalty of 15% per month (with a maximum of 75%) of the deficiency on the tax return (when filed)
A penalty of 5% per month (up to a maximum of 25%) is imposed on the amount of tax shown as being due on the return if a taxpayer fails to file a tax return by the due date, including any extension. If the return was over 60 days late, the minimum penalty amount is the smaller of $435 or 100% of the unpaid tax. If fraud is the reason for failure to file on a timely basis, then the penalty is 15% per month (with a maximum of 75%).
Authorities
IRC 6651(f)
Filing IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, gives you:
a 6-month extension to file the tax return.
an extension of time to pay the amount of taxes due.
no interest on the amount due from the original due date of the return, which for most taxpayers is April 15.
a penalty-free period of 6 months if you cannot pay the taxes due by the filing date.
