Federal Tax Procedures and Legislative Process

Question 1

List the eight common penalties imposed on tax payers.

Answer 1

1) Earned Income Credit Penalty
2) Penalty for Failure to Make Estimated Income Tax Payments
3) Failure-to-File Penalty
4) Failure-to-Pay Penalty
5) Negligence Penalty with Respect to an Understatement of Tax
6) Penalty for Substantial Underpayment of Tax
7) Penalty for a Substantial Valuation Misstatement
8) Fraud Penalties

Question 2

Summarize the Earned Income Credit Penalty

Answer 2

Taxpayers who negligently claim the earned income credit may lose the ability to claim the credit for two years or, if fraudulently claimed, for up to three years.

Question 3

Summarize the penalty for failure to make estimated income tax payments.

Answer 3

Taxpayers (including corporations, estates, and trusts) who do not have sufficient amounts of withholding and who do not make timely payments of estimated income tax (including self-employment tax) must pay this penalty, which accrues from the date the estimated income tax must be paid until the tax return due date without extensions.

Question 4

Summarize the failure-to-file penalty

Answer 4

Generally 5% of the amount of tax due for each month (or any portion thereof) the return is not filed.

Generally, the penalty cannot exceed a maximum of 25% of the amount of tax due.

The minimum penalty if the income tax return is more than 60 days late is the leser of $135 or 100% of the tax due.

If no tax is due, then there is no failure-to-file penalty

If both the failure-to-file penalty and the failure-to-pay penalty are due, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty.

Question 5

Summarize the failure-to-pay penalty.

Answer 5

One-half of 1% per month (of any fraction thereof) up to a maximum of 25% of the unpaid tax.

Exception: no failure-to-pay penalty if (i) at least 90% of the tax is paid in by the unextended due date and (ii) the balance of the tax is paid by the extended due date. (Note: Interest is due on the amount of tax not paid in by the unextended due date.)

Question 6

Summarize the negligence penalty with respect to an understatement of tax.

Answer 6

The penalty amount is 20% of the understatement of tax.

Defense: The taxpayer has a reasonable basis for the tax position even if the tax return does not disclose the tax position.