Different Types of Penalties

Question 1

What are the 2 THINGS that the failure to pay penalties apply to?

Remember that the failure to file penalty doesn’t apply to estimated tax returns.

Answer 1

Failure to PAY:

(1) regular income tax penalties
(2) estimated tax penalties

Question 2

What are the failure to file a return penalties under IRC 6651(a)(1) about?

How much is the penalty tax? What is max?

How much additional tax for additional months you haven’t filed?

If the return is at least 60 days late, is there a minimum penalty?

Do these rules apply to estimated tax penalties?

Answer 2

• Failure to file return on the due date of the return (determined with regard to any valid extensions).
• 5% per month up to 25% of the net amount of tax due. (Maxes out at 25%)
• 5% for first month, or any part thereof, and additional 5% for each additional month or part thereof (up to 25%). [Penalty applies to first month you’re late and then every month when you didn’t file portion of it.
• Also, if return is at least 60 days late, there is a minimum penalty of $205 or the amount of tax required to be shown on the return.
• Remember, that this is for regular tax; not estimated tax penalties which are for people who don’t have withholding

Example: due in April 15 and you don’t file; 5% in April + 5% in May + 5% in June…then maxes out in 25%.

Question 3

What is the fraudulent failure to file penalty under IRC 6651(f) about?

What is considered fraud?

Answer 3

If any failure to file a return is due to fraud, the penalty is increased to 15% (not 5%) per month or part thereof, up to 75% (not 25%) of the net amount of tax due.

Fraud is intentional and voluntary violation of known lawful duty.

Question 4

What is considered timely filing?

What is deemed the date the return is filed through mail, certified mail, and electronic filing?

What do courts look at it if postmark or electronic filing confirmation is not available?

Answer 4

• Timely mailing is deemed timely filing. IRC 7502.
• The date of the U.S. Postal Service postmark (or designated private delivery service) found on the envelope carrying the return is deemed the date the return is filed.
• Also similar rules for certified mail and electronic filing.
• Courts can look to other evidence if postmark or electronic filing confirmation is not available, but taxpayer’s uncorroborated testimony of mailing is insufficient to prove timely filing.

Question 5

What are the penalty rules for failure to pay tax on the date prescribed under IRC 6651(a)(2) about?

How much are the penalties?

When is it increased?

When is it reduced?

Answer 5

• Failure to pay tax on the date prescribed for such payment (determined without regard to any extensions of time for payment).
• 0.5% per month up to 25% of the net amount of tax due.
• 0.5% for first month or any part thereof, and an additional 0.5% per month for each additional month or part thereof.
• Increased to 1% per month for each month or part thereof beginning after the day that is 10 days after a Notice of Intent to Levy or Jeopardy Notice [when you don’t communicate with IRS]
• Reduced to .25% per month for each month or part thereof if there is an Installment Agreement in place.

Question 6

What are the rules for failure to pay tax required to be shown on return (but not shown) under IRC 6651(a)(3) about?

What are the penalties?

What happens if you don’t respond to the IRS?

What happens if you have an installment agreement in place?

Answer 6

When you’ve been audited, additional tax levied, and you don’t pay that additional tax.

• If failure to pay within 21 days from the date of notice and demand for payment (or within 10 days if amount is $100,000 or more):
• • 0.5% of net amount of tax due for first month or part thereof and an additional .5% for each additional month
• • Increased to 1% per month for each month or part thereof beginning after the day that is 10 days after a Notice of Intent to Levy (to seize assets) or Jeopardy Notice (assessment or collection endangered if regular procedures followed)
• • Reduced to .25% per month for each month or part thereof if there is an Installment Agreement in place.

Question 7

What are the rules for combining delinquency penalties (failure to file and failure to pay penalties?

Does the rule apply to failure to pay the additionally assessed tax penalty under IRC 6651(a)(3)?

Answer 7

The amount of LATE FILING penalty is reduced by the amount of the LATE PAYMENT penalty for any month in which both penalties are imposed. Thus, the maximum of both penalties can never be more than 47.5%:

• • Months 1-5 are 4.5% of late FILING penalty (up to 22.5%);
• • Months 1-50 are 0.5% of the late PAYMENT penalty (up to 25%)

Why 47.5%?
- After you max out the late filing penalty and when they run together, you end up 47.5%, not 50% (late filing and late payment penalties reduced during first 5 months (won’t be 5% for first 5 months)

• Failure to file = 5 months at 5% = 25%; but if you reduce by .5% for each for the first 5 months = 2.5%. So, for first 5 months, it’s 22.5% for failure to file.
• Failure to pay = 25% max.
• So if you combine failure to file + failure to file = 22.5% + 25% = 47.5%.
• This rule does NOT apply to failure to pay penalty under IRC 6651(a)(3) [failure to pay the additionally assessed tax]

Question 8

1. What is the first time abatement rule?
2. What are the 3 requirements?
3. If taxpayer is not in compliance, what should happen?
4. What does this rule apply and not apply to?
5. Do you have to request it?
6. What happens if it’s denied?
7. Is it in the codes or regulations?

Answer 8

1. Under IRM 20.1.1.3.6.1, penalty relief for delinquency penalties
2. IF:
   1 - Taxpayer had no prior penalties (except estimated tax penalty) for the preceding 3 years;
   2 - Taxpayer has filed (or is on extension) for all returns; AND
   3 - Taxpayer paid or arranged to pay any tax due
3. If taxpayer is not in compliance, opportunity should be given to comply before considering FTA.
4. Only applies to DELINQUENCY penalties [failure to file, failure to pay]; does NOT apply to estate tax returns, estimated tax penalties, accuracy-related, or fraud penalties
5. Must request it
6. If denied, ask for supervisor or request taxpayer assistance
7. Not in codes or regulations; just something nice that IRS does if you’re good paying taxpayer and you hit rough patch out of no where.

Question 9

What is the reasonable cause rule for failure to FILE and PAY?

Answer 9

Under IRC 6651, failure to file and pay penalties will not be imposed if the failure to file or pay is “due to REASONABLE CAUSE and NOT WILLFUL NEGLECT.”

Question 10

What are the SPECIAL REASONABLE CAUSE RULE and what are its 4 requirements for the failure to pay penalty?

Answer 10

Reasonable cause is ASSUMED and NO PENALTY APPLIED if:

1. Taxpayer has a valid extension of time to file;
2. Pays 90% of the tax due;
3. Files the return by the extended due date; AND
4. Pays the remaining amount due with the return.

• You have to act with reasonable cause and not willful neglect
• If you’re within 90% = assumed to act reasonably

Question 11

What is reasonable cause FOR FAILURE TO PAY and FILE under Treas. Reg. § 301.6651–1(c)(1)?

Remember, that reasonable cause is different one for failure to PAY ESTIMATED income tax returns.

Answer 11

Remember first that: Under IRC 6651, failure to FILE AND PAY penalties will not be imposed if “such failure is due to reasonable cause and not due to willful neglect.”

Reasonable cause means that the “the taxpayer EXERCISED ORDINARY BUSINESS CARE AND PRUDENCE and was nevertheless unable to file the return within the PRESCRIBED TIME.

Question 12

What is reasonable cause for FAILURE TO PAY and FILE under Internal Revenue Manual 20.1.1.3.2.2(1)?

What does it include?

Answer 12

A taxpayer may establish reasonable cause by providing facts and circumstances showing that he or she EXERCISED ORDINARY BUSINESS CARE and PRUDENCE (taking that degree of care that a reasonably prudent person would exercise), but NEVERTHELESS WERE UNABLE TO COMPLY WITH THE LAW.

It includes making PROVISIONS for BUSINESS OBLIGATIONS to be met when REASONABLY FORESEEABLE EVENTS OCCUR.

Question 13

What are reasonable cause factors that the IRS considers for delinquency scenarios under the IRM?

Answer 13

Under IRM 20.1.1.3.2.2:

• The taxpayer’s explanation
• The taxpayer’s compliance history
• The length of time between the noncompliance and subsequent compliance
• And any circumstances beyond the taxpayer’s control

Question 14

What is US v. Boyle about?

What does the IRS like to cite?

What do attorneys/accountants like to cite?

Answer 14

• Facts: Executor of estate hired a lawyer to handle the estate, including filing the Form 706. Executor had no experience with estate taxes. Executor called the lawyer several times to determine if return was filed. Despite assuring the executor that it would be taken care of, the lawyer failed to file on time
• Holding: “One does not have to be a tax expert to know that returns have fixed filing deadlines and that taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common but that reliance cannot function as a substitute for compliance with an UNAMBIGUOUS STATUTE…such reliance is not reasonable cause for a late filing penalty under 6651(a)(1).” [THIS IS WHAT IRS LIKES TO USE]
• Estate of Boyle Dicta: “When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to SEEK a ‘SECOND OPINION,’ or to try to MONITOR COUNSEL on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.” [WHAT ATTORNEYS/ACCOUNTANTS LIKE TO USE]

MY NOTES:

• Can’t blame other people for not filing on time; it’s taxpayer’s ”nondelegable duty” = can’t delegate to someone else; their obligation as taxpayer; not accountant’s obligation to file
• Court said you don’t have to be an expert to know when is deadline and how to submit
• Dicta: if you’re asking about tax law from professional, can be protected; don’t have to double check

Question 15

What is reasonable cause defense rules for failure to pay ESTIMATED TAXES under IRC 6654(e)(3) about?

Answer 15

1. No addition to tax shall be imposed by reason of CASUALTY, DISASTER, or other UNUSUAL CIRCUMSTANCES the imposition of such addition to tax would be against equity and good conscience.
2. For NEWLY RETIRED or DISABLED individuals, NO ADDITION to tax shall if the Secretary determines that– the taxpayer– retired after having attained AGE 62, or became disabled, in the taxable year for which estimated payments were required to be made or in the taxable year preceding such taxable year, and such underpayment was due to reasonable cause and not to willful neglect.

Reasonable cause defense for estimated taxes is very limited. Not very strong; more like an interest charge in the first place; so, people generally just have to pay them (viewed more like additional interest to pay into the system)

Question 16

What are ACCURACY related penalty on underpayments under IRC 6662 about?

How much is the penalty? How much is the INCREASED penalty?

What scenarios warrant the accuracy related penalty?

What scenarios warrant the INCREASED accuracy related penalty?

Answer 16

They are UNDERPAYMENT PENALTIES on the ADDITIONAL that the IRS assessed on your filed return that was missing from your return. (example: filed 100k tax return, but IRS assessed that it’s actually 200k; so, the underpayment penalties will be on the new 100k that was assessed.)

20% penalty for:

1. Negligence or disregard of rules or regulations
2. Substantial understatement of income tax
3. Substantial valuation misstatement
4. Substantial overstatement of pension liabilities
5. Substantial estate or gift tax valuation misstatement
6. DISCLOSED transaction that lacks economic substance or fails to meet requirements of any similar rule of law

40% penalty for:

• Gross misstatement of valuation, pension liabilities, or estate and gift
• UNDISCLOSED transaction that lacks economic substance or fails to meet requirements of any similar rule of law
• UNDISCLOSED foreign financial asset understatement

Question 17

How can you stack of penalties?

Answer 17

Multiple penalties may not be “stacked” on the same understatement.

ACCURACY related penalty on underpayments (6662) only apply when a return has been FILED; so the penalty cannot be stacked with a failure to file penalty.

Accuracy related penalty on underpayments (6662) may not be stacked with the FRAUD penalty (6663) or the penalty with respect to REPORTABLE TRANSACTIONS (6662A).

*Only one penalty can apply (can’t add them up for qualifying for more than one the listed reasons)

Question 18

What are the negligence penalties under IRC 6622 (this is an accuracy related penalty)?

What is a defense to negligence penalties?

Answer 18

They’re penalties for failure to make a reasonable attempt to comply with the provisions of the IRC or to exercise ordinary and reasonable care in the preparation of a tax return. IRC 6662(c) and Treas. Reg. 1.6662-3(b)

Failure to do what a reasonable and ordinarily prudent person would do under the same circumstances. (Marcello v. Commissioner)

Example of negligence: deduct personal expenses for business’ return; not keep books or records (makes up numbers)

Defense: A position that has a reasonable basis is not negligent.

Question 19

1. What is the reasonable basis defense for negligence penalties?
2. What kind of standard is it?
3. When is there reasonable basis?
4. When is there NOT a reasonable basis?

Answer 19

1. A position that has a reasonable basis is not negligent.
2. Under Treas. Reg. 1.6662-3(b)(3), reasonable basis is a relatively high standard of tax reporting that is significantly HIGHER than not frivolous or not patently improper.
3. If a return position is reasonably based on ONE or MORE of the authorities used for the SUBSTANTIAL AUTHORITY standard, then the position HAS a reasonable basis.
4. The reasonable basis standard is NOT satisfied by a return position that is merely arguable or that is merely a colorable claim.

Question 20

What is the disregard of rules or regulations penalties under 6662 (this is an accuracy related penalty)?

Answer 20

“Disregard” includes any careless, reckless, or intentional disregard of rules or regulations (including notices issued by the IRS).

Question 21

What is the ADEQUATE DISCLOSURE DEFENSE for disregard of rules or regulations penalties under 6662?

Answer 21

There is adequate disclosure on properly completed Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement – use if challenging regulation) [ONLY FOR REGULATION CHALLENGES; CAN’T USE ON IRS CODE CHALLENGES], AND
in the case of a position contrary to a regulation, the position represents a good faith challenge to the validity of a regulation.

Example: Taking position against code. If you are taking position against REGULATION, you need to file a 8275-R form that they have for positions counter REGULATION. You can challenge Treasury’s regulations but not Congress’s IRS code.

Example: Taxpayer disagreed with married person’ rate. Court said: intentional disregarding of code of regulation. Holding: you have to comply with code and file and then ask for refund and take it to court

Question 22

What is the SUBSTANTIAL UNDERSTATEMENT penalty under 6662 (this is an accuracy related penalty)?

Answer 22

It’s a penalty for substantial understatement of income tax:

For Individuals: Understatement exceeds the greater of:

• 10% percent of the tax required to be shown on the return, or
• $5,000.

For Corporations: Understatement exceeds the lesser of:

• 10% of the tax required to be shown on the return (or, if greater, $10,000), or
• $10,000,000.

In most cases = understatement if tax exceeds 10,000

Question 23

What 2 defenses reduce the understatement penalty?

What are the steps for how to use the defenses?

Answer 23

A “substantial understatement” of tax is reduced by any portion of the understatement:
1. that is supported by “substantial authority”;
or
2. that is both supported by a “reasonable basis” AND is “adequately disclosed”

Steps for defending:
Step 1 – did you meet the monetary thresholds for substantial understatement?
Step 2 – did you have substantial authority support or reasonable basis and adequate disclosure?

Question 24

What is the “substantial authority” defense used for?

WHEN IS THERE SUBSTANTIAL AUTHORITY?

Is is a subjective or objective standard?

What kind of weight does it have?

What authorities DO and DO NOT qualify?

What happens if there is no authority?

Is it a higher or lower standard than the reasonable basis standard?

What do you do if there are weird facts?

Answer 24

• The defense is used as support for REDUCING the SUBSTANTIAL UNDERSTATEMENT penalty. (The other possible defense is reduction supported by a reasonable basis and adequately disclosed)
• There is substantial authority ONLY if the WEIGHT of AUTHORITY SUPPORTING the tax treatment is SUBSTANTIAL in relation to the WEIGHT of authority supporting a CONTRARY treatment.*
• Objective standard involving application of the law to the relevant facts.
• The WEIGHT accorded to an authority DEPENDS on its RELEVANCE and PERSUASIVENESS and the TYPE of DOCUMENT providing the authority
• Only the authorities listed in Treas. Reg. 1.6662-4(d)(3)(iii) may be considered. Includes Internal Revenue Code, temporary and final regulations, revenue rulings and procedures, treaties, cases, congressional intent as reflected in congressional history, private letter rulings, technical advice memos, action on decisions and general counsel memos, IRS notices, announcement and press releases
• Conclusions reached in treatises, legal periodicals and legal opinions rendered by tax professionals are NOT authority, but the authorities underlying such expressions of opinion may give rise to substantial authority
• *Instructions on IRS forms are not substantial authority!!!! But relying on IRS form instructions may get you reasonable cause
• If there are no authority = treatises, etc. can be relied on (last resort)
• The standard is lower than the more likely than not standard but higher than the reasonable basis standard. A return position that is arguable but unlikely to prevail in court satisfies the reasonable basis standard but not the substantial authority standard.
• Can be tricky for weird facts; example: hobby loss cases = when question is only the facts since laws are indisputable. Use analogies to cases with similar fact

Question 25

What is the meaning of the REASONABLE BASIS + ADEQUATE DISCLOSURE for the defense to understatement penalties?

Answer 25

REASONABLE BASIS:

• Defined in Treas. Reg. 1.6662-3(b)(3)
• Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper.
• The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.
• If a return position is reasonably based on one or more of the authorities used for the substantial authority standard, then the position has a reasonable basis.

ADEQUATE DISCLOSURE:

• Defined in Treas. Reg. 1.6662-4(f)
• Must use Form 8275 (use for things you’re not uncertain about) or 8275-R (use for relying on regulations)
• Special rules via Rev. Proc. 2019-42
• Schedule UTP

Question 26

What are the special reduction/defense rules for TAX SHELTERS for substantial understatement penalties under 6662?

Answer 26

Tax shelter: Any partnership, entity, investment, plan or arrangement, if a significant purpose of such partnership, entity, investment, plan or arrangement was the avoidance or evasion of tax. IRC 6662(d)(2)(C).

For individuals, understatement is reduced only if:

• Substantial authority PLUS reasonable belief/more likely than not correct
• Disclosure has no effect

For corporations, the understatement CANNOT be reduced ever – NO DEFENSE.

Question 27

What are Qualified Amended Returns for substantial understatement penalties?

What does a QAR do for understatements of returns?

Does the substantial understatement penalty APPLY on the newly reported tax?

Answer 27

A QAR is a timely-filed amended return that corrects an error in a previously filed return before the IRS catches and notifies you.

The tax liability reflected on a QAR reduces the understatement on the original return for purposes of the substantial understatement penalty.

The substantial understatement penalty WON’T APPLY on the newly reported tax.

To be timely, a QAR must be filed before:

1. The IRC contacts the taxpayer about an examination or investigation;
2. The IRS contacts a passthrough entity in which the taxpayer is a partner or a member;
3. The IRS issues a John Doe summons with respect to a class of which the taxpayer is a member; or
4. The IRS issues a settlement notice about a settlement initiative relating to a listed transaction reflected on the return.

• QAR rules do not apply to any position on the return attributable to fraud.*

Question 28

What is the SUBSTANTIAL VALUATION MISSTATEMENT penalty under IRC 6662(e)?

How much is the penalty?

When does the penalty apply for individuals? Corporations?

Does the reasonable cause defense apply?

Answer 28

• There is a substantial valuation misstatement penalty if the value of any PROPERTY (or the adjusted basis of any property) claimed on any return is 150% or more of correct amount.
• Applies if the misstatement is GREATER THAN $5,000 ($10,000 for corporations).
• The penalty is 20% of the resulting understatement.
• Reasonable cause defense applies, subject to special rules (next class for reasonable cause).

Question 29

What is the GROSS VALUATION MISSTATEMENT penalty under IRC 6662(h)?

What 2 things are considered gross valuation misstatements?

Answer 29

• The 20% understatement penalty is increased to 40% of the understatement if the valuation misstatement is 200% or more of the amount determined to be the correct amount.

Applies to:

1. When the misstatement is 200% or more of the amount determined to be the correct amount
2. If IRS finds you have 0 basis under Treas. Reg. 1.6662-5(g)

Question 30

What are the other 6662 penalties?

Answer 30

• Similar 20% and 40% penalty structures for the following types:
  1. Substantial and gross misstatements of pension liabilities; IRC 6662(f); and
  2. Substantial and gross estate or gift tax valuation understatements; IRC 6662(g).

Question 31

1. What is the NON-ECONOMIC SUBSTANCE PENALTY under IRC 6662(b)(6)?
   * REMEMBER THIS ONE
2. Does the reasonable cause defense apply?
3. What is the economic substance test?

Answer 31

1. If any portion of an underpayment is attributable to non-economic substance transaction, then the penalty is:
   - 20% if the transaction was adequately disclosed; or
   - 40% if the transaction was not adequately disclosed.
   It applies to transactions that DO NOT HAVE ECONOMIC SUBSTANCE or FAIL TO MEET THE REQUIREMENT of any similar rule of law (no business purpose, step transaction).
2. No reasonable cause exception – STRICT LIABILITY
3. Test:
   1 - There was no objective potential to make a profit; or
   2 - there was no subjective intent to make a profit.
   Must have BOTH objective and subjective profit intention

Question 32

What is the UNDISCLOSED FOREIGN ASSET PENALTY under IRC 6662(b)(7), (j)?

How much is the penalty?

What are the 4 forms that this penalty applies to?

Does the reasonable cause defense apply?

Answer 32

• If any understatement is attributable to an undisclosed foreign financial asset, there is a penalty of 40% of the understatement.
• Includes failure to disclose assets reportable on the following returns:
  1. 6038 (information with respect to certain foreign corporations or partnerships)
  2. 6038B (notice of transfers to foreign persons)
  3. 6038D (information with respect to specified foreign financial assets)
  4. 6048 (information regarding the creation of or transfer to a foreign trust).

Reasonable cause exception applies.

Question 33

What are the “HEIGHTENED” STANDARDS for GROSS VALUATION MISSTATEMENT OF CHARITABLE DEDUCTION PROPERTY?

Does the reasonable cause defense apply?

Answer 33

• If the taxpayer took a charitable deduction for property and claimed a value of 200% or more of the amount determined to be the correct amount of such valuation or adjusted basis, the taxpayer will be subject to a 40% gross valuation misstatement penalty unless the taxpayer can show that:
• the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and
• in addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contributed property. IRC §§ 6662(h); 6664(c)(3).
• Can’t use reasonable cause!

Question 34

What is the REASONABLE CAUSE defense for ACCURACY and FRAUD penalties under IRC 6664(c)(1)?

How do you determine if there was reasonable cause?

What’s the most important factor in assessing the taxpayer’s effort?

To what penalties does the reasonable cause defense not apply to?

Answer 34

• Treas. Reg. § 1.6664-4(b)(1): No penalty for underpayment if it is shown that there was a REASONABLE CAUSE for such portion and that the TAXPAYER ACTED in GOOD FAITH with respect to such portion.
• The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances.
• The most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.
• It does not apply to Non-Economic Substance Penalty and Gross Valuation Penalty Misstatement of Charitable Deduction Property

Question 35

What is the 3 part test for reliance on professionals for reasonable cause for accuracy and fraud penalties from Neonatology Associates case?

Answer 35

1. the advisor was a competent professional who had sufficient expertise to justify reliance;
   - Competent = they have no conflicts in giving you advice; can’t be competent if person has a stake in the transaction; has to be someone neutral)
   - Sufficient expertise = if taxpayer reasonably believed that person they were hiring has expertise
2. the taxpayer provided necessary and accurate information to the adviser; and
   - You have to tell your tax professional everything for them to give you advice; have to present to IRS that you told tax preparer everything they needed to know and all of the statements were true and accurate and complete
3. the taxpayer relied in good faith on the advisor’s judgment.
   - Used to counter things that were “too good to be true”
   - If you opinion shop to 3 people and go to 4th person and they give you opinion you want = then you’re not relying on good faith on the taxpayer’s opinion because you’ve already been educated on the topic

Neontology case: Association of dentists argued they relied on professionals
Holding: the transaction was too good to be true and no one in good faith thought they can do it (can’t rely on insurance guy for tax advice for example)

Question 36

What are the views from courts regarding reasonable cause for reliance on professionals?

Answer 36

US v. Estate of Boyle: “When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. - To require the taxpayer to challenge the attorney, to seek a ‘second opinion,’ or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.”
- Practitioners like to cite the dicta that you don’t have to get second opinion and can rely in good faith on tax preparers

Long Term Capital Holdings v. US: Determining that reliance upon a law firm opinion was unreasonable, in part due to the opinion’s failure to address certain precedent and its superficial analysis of the economic substance doctrine.
- IRS will cite it to defend themselves if you have sophisticated tax preparer; held that taxpayer needs to understand the tax opinion, double check the authorities; taxpayer can usually figure out themselves.

Question 37

What penalties are under 6651(a)(1)?

What penalties are under 6651(a)(2)?

What penalties are under 6651(a)(3)?

What penalties are under 6651(f)?

Answer 37

6651(a)(1) = Failure to FILE return on the due date of the return [5% per month up to 25% of the net amount of tax due]

6651(a)(2) = Failure to PAY on date prescribed for such payment [0.5% per month up to 25% of the net amount of tax due]

6651(a)(3) = Failure to PAY Tax Required to Be Shown on Return (but not shown) [failure to pay the additional tax assessed = 0.5% of net amount of tax due for first month or part thereof and an additional 5% for each additional month]

6651(f) = Fraudulent failure to file [penalty is increased to 15% per month; up to 75% of the net amount of tax due]

Question 38

What are the 4 requirements to be a valid return under Beard v. Comm’r?

Answer 38

A valid return is one that

(1) contains sufficient data to calculate a tax liability;
(2) purports to be a return;
(3) represents an honest and reasonable attempt to satisfy the requirements of the tax law; and
(4) is executed by the taxpayer under penalties of perjury.

Question 39

How is there never more than 47.5% of penalties?

Answer 39

If both the penalty for failure to file and the penalty for failure to pay apply to any month, the failure to file penalty for that month (5%) is REDUCED by the failure to pay penalty for that month (0.5%).

This means that the maximum combined amount you can pay on a delinquent return is 47.5% of the net tax due – 25% on the failure to pay penalty, and 22.5% for the failure to file penalty (25% maximum less the 2.5% failure to pay penalty that applies for the five months that the failure to file penalty is computed before hitting its maximum).

Assume in the previous example that you failed to obtain a six-month extension to file, and didn’t file your 2013 return until August 19, 2014, at which point a $100,000 net tax liability was paid to the IRS.

You would find yourself subject to both Sections 6651(a)(1) and 6651(a)(2). Because the return was FILED five months late (four full months plus a faction of a fifth), a late filing penalty of 22.5% – 25% less the 2.5% late payment penalty applied to the same period, or $22,500 – would be imposed.

In addition, a failure to PAY penalty of 0.5% for five months, or $2,500, would also be tacked on under Section 6651(a)(2), bringing the total penalty price tag to $25,000 on a $100,000 tax bill.

Question 40

What is the difference between the reasonable cause defense for delinquency penalties versus accuracy/fraud penalties?

Answer 40

Delinquency penalties (failure to file and pay): Taxpayer EXERCISED ORDINARY BUSINESS CARE and PRUDENCE (taking that degree of care that a reasonably prudent person would exercise), but NEVERTHELESS WERE UNABLE TO COMPLY WITH THE LAW/FILE IN TIME.

For accuracy and fraud penalties: If the taxpayer ACTED in GOOD FAITH with respect to such portion. The most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.

Question 41

4 forms where the 40% undisclosed foreign financial asset understatement penalty applies:

What is 6038?

What is 6038B?

What is 6038D?

What is 6048?

Answer 41

1. 6038 = information with respect to certain FOREIGN CORPORATIONS or PARTNERSHIPS
2. 6038B = notice of TRANSFERS to foreign persons
3. 6038D = information with respect to SPECIFIED FOREIGN FINANCIAL ASSETS
4. 6048 = information regarding the CREATION of or TRANSFER to a FOREIGN TRUST

Question 42

What are the penalties reportable transactions under 662A?

How much is the penalty?

What happens if it’s not adequately disclosed?

Answer 42

If the taxpayer has a “reportable transaction understatement” for any taxable year, a penalty is imposed equal to 20% of the amount of such understatement.

If the taxpayer does not adequately disclose the facts affecting the tax treatment of the transaction, the penalty rate is increased to 30%.