108 STUDY GUIDE 4133 TAXPAYER PENALTIES Flashcards
4133.01
Failure to file and failure to pay
Failure to file and failure to pay
- If a taxpayer fails to file a tax return by the due date, including any extension, 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 the failure to file is due to fraud, the penalty is 15% per month (up to a maximum of 75%).
- If a taxpayer fails to pay the tax shown as due on the return, a penalty of 0.5% per month (up to a maximum of 25%) is imposed on the tax due. The penalty amount is doubled if the taxpayer fails to pay the tax once a deficiency assessment has been made.
- During any month in which both the failure to file and failure to pay penalties are applicable, the failure to file penalty is reduced by the amount of the failure to pay penalty.
- These penalties do not apply if the taxpayer can show that either the failure to file or failure to pay was due to reasonable cause, not willful neglect.
- In Haynes and Haynes v. United States, the Western District Court of Texas held that previously decided late-filing penalty cases are not limited to only paper returns. The Court ruled that electronically filed tax returns are subject to the same set of standards as paper returns, and reasonable cause exceptions to the late-filing penalty are the same for both paper and electronically filed returns.
4133.02
Failure to pay estimated tax
- A penalty can be imposed on a taxpayer who fails to pay a sufficient amount of estimated income taxes. The amount of the penalty is based on the interest rate in effect at the time for deficiency assessments.
- The penalty is not applied if the tax due for the year after withholding and credits is less than $500 for corporations or $1,000 for all other taxpayers.
- For an individual, the underpayment of estimated tax is the difference between the estimated tax paid and the lowest of:
1. 90% of the current year’s tax,
2. 100% of the prior year’s tax, or
3. 90% of the tax that would be due on an annualized income computation for the period that runs through the end of the quarter.
If the prior-year AGI of the taxpayer exceeds $150,000 ($75,000 if married filing separate), the 100% above becomes 110%.
(In general, a taxpayer must pay estimated tax if both of the following apply:
1. The taxpayer expects to owe at least $1,000 in tax for the current year after subtracting his or her withholdings and refundable credits.
2. 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.)
- A corporation’s underpayment of estimated tax is generally the difference between the estimated taxes paid and the lowest of:
1. the current-year tax,
2. the prior-year tax, or
3. the tax on an annualized income computation using of one of three computation methods allowed by the Internal Revenue Code. - Any fines and/or penalties paid are not allowed as deductions on the tax return.
4133.03
Accuracy-related penalties
Accuracy-related penalties
- 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.
- Interest on the accuracy-related penalty runs from the due date of the return, including extensions, until the penalty is paid.
- The negligence penalty will apply to an underpayment that is attributable to a failure to make a reasonable attempt to comply with the tax law. A taxpayer is automatically considered negligent if they fail to report income that is covered by an information return (IRS Form 1099) filed by the payor with the IRS.
- A substantial understatement of tax liability occurs if the understatement exceeds the larger of 10% of the tax due or $5,000:
- For a C corporation, a substantial understatement is the lesser of 10% of the tax due (at least $10,000) or $10 million.
- In all cases, the understatement to which the penalty applies is the difference between the amount of tax shown on the return and the amount of tax that should have been shown.
- The penalty can be avoided if:
(a) the taxpayer has substantial authority for the position taken or
(b) there is adequate disclosure of the position taken on the IRS Form 8275 attached to the return.
- Substantial valuation overstatement:
1. The penalty is 20% of the additional tax that should have been paid if the correct value of the property had been used.
2. The penalty applies only if the valuation used is 150% or more of the correct valuation. The penalty is doubled if the taxpayer makes a gross overvaluation (200% or more).
3. The penalty only applies when the income tax underpayment that results from the overvaluation exceeds $5,000 ($10,000 for a C corporation). - Substantial valuation understatement:
1. An accuracy penalty can be imposed for an estate or gift tax valuation understatement.
2. The penalty is 20% of the additional estate or gift tax that would be due if the correct valuation had been used.
3. The penalty is imposed only if the value of the property claimed on the return is 65% or less than the correct valuation.
4. The penalty is doubled if the taxpayer makes a gross undervaluation (the reported value is 40% or less than the correct value).
5. The penalty only applies if the additional estate or gift tax liability exceeds $5,000.
4133.04
Civil fraud penalty
Civil fraud penalty
- A 75% civil penalty is applied to any underpayment of tax resulting from fraud by the taxpayer.
- If the fraud penalty is applicable, then the accuracy-related penalty is not applied to the same portion of the underpayment of tax.
4133.05
Penalty on erroneous refund claims
- If a taxpayer files a claim for refund that is greater than the amount actually allowable, a penalty equal to 20% of the improperly claimed amount applies.
- The penalty does not apply if the taxpayer can show that they had a reasonable basis for the excessive refund claim.
4133.06
False information: Withholding
- A civil penalty of $500 applies if a taxpayer claims withholding allowances that are based on false information.
- A criminal penalty can also apply to a willful failure to supply information or for willfully supplying false or fraudulent information regarding withholding. The penalty is an additional fine of up to $1,000 and/or up to one year in prison.
4133.08
Criminal penalties: The criminal tax penalties in the Internal Revenue Code include the following:
- Willful attempt to evade or defeat tax: The maximum penalty is a $100,000 fine and/or five years in prison. For a corporation, there is no imprisonment, but the maximum fine is $500,000.
- Willful failure to collect or account for and pay over tax: The maximum penalty is $10,000 fine and/or five years in prison.
- Willful failure to pay a tax or an estimated tax, to file a required return, to keep required records, or to provide required information: The maximum penalty is a $25,000 fine and/or one year in prison. For a corporation, there is no imprisonment, but the maximum fine is $100,000.
- Willfully furnishing an employee with a false statement regarding tax withholding on wages: The maximum penalty is a $1,000 fine and/or one year in prison.
- Making a knowingly false declaration under penalty of perjury, preparing or assisting in preparation of a fraudulent return or other documents, or concealing goods or property in respect of any tax: The maximum penalty is a fine of $100,000 and/or three years in prison.
Negligence
Negligence
Negligence is the failure to exercise the ordinary reasonable care required under the circumstances. In a civil tort, no knowledge of error or falsity or reckless disregard need be proven (ordinary or simple negligence as distinguished from gross negligence).
When applied to accountants, negligence involves the following:
Failure to follow GAAP/GAAS
Failure to do what duty requires to be done (e.g., failure to investigate further missing or suspicious data)
Disregard of warnings or suspicious comments, behavior, or documents
Estimated Taxes
Individuals, corporations, estates, and trusts must make payments of estimated taxes in order to avoid a penalty for underpayment of estimated taxes. Most often, self-employed people need to pay quarterly installments of estimated tax. Similarly, investors, retirees, and others—a substantial portion of whose income is not subject to withholding—often need to make these payments as well. Besides self-employment income, other income generally not subject to withholding includes interest, dividends, capital gains, alimony, and rental income.
Because the U.S. tax system operates on a pay-as-you-go basis, taxpayers are required, by law, to pay most of their tax liability during the year. This means that an estimated tax penalty will normally apply to anyone who pays too little tax, usually less than 90%, during the year through withholding, estimated tax payments, or a combination of the two.
Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. In addition, there is an exception to the penalty for those who base their payments of estimated tax on last year’s tax. Generally, taxpayers will not have an estimated tax penalty if they make payments equal to the lesser of 90% of the tax to be shown on their current-year return or 100% of the tax shown on their prior-year return (110% if their income was more than $150,000). See IRS Form 2210 and its instructions for more information.
Regular Tax Liability
Regular Tax Liability
By definition, the alternative minimum tax (AMT) is an extra tax imposed in addition to the regular tax liability. The regular tax for this purpose is the regular tax liability (as defined in IRC Section 26(b)) reduced by only the foreign tax credit. It does not include investment tax credit recapture.
IRC Section 55(c)
The regular tax liability is computed without regard to the AMT, the environmental tax, corporate penalty taxes including the accumulated earnings tax, the personal holding company tax, the built-in gain tax on S corporations, and the tax imposed on the passive income of S corporations.
IRC Sections 55, 59A, 532, 541, 1374, and 1375
Standard Deduction
The standard deduction is an amount specified by federal income tax law to be deducted from AGI when it exceeds the allowable itemized deductions of the taxpayer. The amount is indexed for inflation and is dependent on the taxpayer’s filing status. According to IRS Publication 501, the standard deduction is higher for taxpayers who are age 65 or older and/or blind.
In addition, the standard deduction for an individual who can be claimed as a dependent on another person’s tax return is generally limited. Certain other taxpayers are prohibited from declaring the standard deduction (e.g., a married couple electing to file separately and where one spouse elects to itemize).
