R5 Federal, Legislative and Judicial Processes

Question 1

List the 8 common penalties imposed on TP.

Answer 1

1. Earned Income Credit Penalty
2. Penalty for failure to Make ES 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 Substantial Valuation Misstatement
8. Fraud Penalties

Question 2

Summarize the EIC penalty.

Answer 2

TP who negligently claim the EIC may lose the ability to claim this credit for 2 years or if fraudulently claimed for up to 3 years.

Question 3

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

Answer 3

TP (including corp, estates, and trust) who do not have sufficient amount of withholding and who do not make timely payments of ES income tax (including SE tax) must pay this penalty, which accrues from the date the ES income tax must be paid until the tax return due date without extension.

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 lesser 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 reasonable basis for the tax position even if the tax return does not disclose the tax position.

Question 7

Summarize the penalty for substantial underpayment of tax.

Answer 7

Except as set forth below, an understatement of tax is substantial if the understatement exceeds the greater of 10% of the correct tax or $5,000.

For C corporations other than PHC, an understatement is “substantial” if the amount of the understatement exceeds the lesser of (a) $10 million or (b) the greater of $10K or 10% of the correct tax.

If the tax return adequately disclosed to the tax position (other than a tax shelter), then the TP can avoid the penalty if the TP has a reasonable basis for the tax position.

If the TR does not disclose the tax position, then the taxpayer can avoid the penalty only if the TP has substantial authority for the tax position (except for tax shelter)