Tax 8-11,12 Penalties Flashcards
Tax Penalties
Identify the potential tax penalties involved in each of the following situations
A taxpayer, who is a waitress, willfully under reports by 40% the amount of tips she receives.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
b. civil fraud, due to the willful under reporting
Tax Penalties
Identify the potential tax penalties involved in each of the following situations
A taxpayer, who is a waitress, is careless about keeping accurate records of her tip income, and, as a result, under reports her tip income by 15%.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
g. negligence, due to the failure to make a reasonable attempt to comply with the law or exercise ordinary and reasonable care in the preparation of the tax return
Tax Penalties
Legitimate methods of tax reduction, conducted in a fashion of full and open disclosure, constitute _____.
Illegal, fraudulent, or deceitful methods of tax reduction constitute _____.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
Legitimate methods of tax reduction, conducted in a fashion of full and open disclosure, constitute tax avoidance.
Illegal, fraudulent, or deceitful methods of tax reduction constitute tax evasion.
Tax Penalties Module Check
- For a taxpayer with an AGI in excess of $150,000 for the prior tax year ($75,000 if married filing separately), the estimated tax penalty safe harbor is
a. 90% of the prior year’s tax liability or 110% of the current year’s tax liability.
b. 90% of the current year’s tax liability or 110% of the prior year’s tax liability.
c. 120% of the prior year’s tax liability or 80% of the current year’s tax liability.
8-11,12
b. 90% of the current year’s tax liability or 110% of the prior year’s tax liability.
The safe harbor is 90% of the current year’s tax liability or 110% of the prior year’s tax liability if the taxpayer’s prior year AGI exceeded $150,000.
Tax Penalties
Taxpayers who fail to pay the taxes shown on their returns by the due dates of the payments are subject to the _____. The amount of the penalty is equal to 0.5% (one-half of 1%) of the tax amount shown on the return for each month (or fraction thereof) that the payment is outstanding, up to a maximum of 25%.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
d. Failure to Pay Penalty
For months in which both the failure to file and the failure to pay penalties are imposed, the failure to file penalty is reduced by the amount of the failure to pay penalty.
How would someone incur the Failure to Pay Penalty? What is the amount of the penalty?
Tax Penalties
Taxpayers who make an underpayment of taxes caused by _____ or disregard of tax laws or regulations, but without the intent to defraud, are subject to the accuracy-related _____ penalty.
According to the Internal Revenue Code, _____ is defined as “any failure to make a reasonable attempt to comply with the provisions of the Code, and the term “disregard” includes any careless, reckless, or intentional disregard.” Taxpayers who fail to keep adequate or proper records are deemed to be _____.
The amount of the penalty is equal to 20% of the portion of the underpayment that is attributable to this behavior. In determining the penalty, any portion of underpayment due to fraud is not taken into account.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
g. Negligence Penalty
Tax Penalties
How would someone incur the Civil Fraud Penalty?
For tax purposes, ____ generally is considered to be bad-faith conduct by a taxpayer with an intent to evade tax. The tax court has set out three elements of
_____:
- a knowing falsehood
- an underpayment of tax
- an intent to evade tax
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
b. Civil fraud
Tax Penalties
Taxpayers who show a _____ income tax on their returns are subject to this penalty. This situational exists if the amount of the understatement exceeds the greater of
- 10% of the tax required to be shown on the return, or
- $5,000 ($10,000 in the case of corporations other than S corporations).
An understatement is equal to the amount of tax required to be shown on the return less the amount of tax actually shown on the return.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
a. Substantial Understatement
Substantial Understatement Penalty
Example. If a taxpayer showed a tax liability on the return of $3,000 and, upon audit, the IRS determined the liability should be $7,000, the amount of the
understatement would be
$4,000
$7,000
$3,000
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$7,000 actual liability
- $3,000 amount paid
= $4,000 understatement
The amount of an understatement is reduced by that portion of the understatement for which there exists “substantial authority” or for which adequate disclosure has been made.
Tax Penalties
Bob Cochran reported an income tax liability of $54,500 (on AGI of $290,000) on his tax return for the previous year (which was a 12-month year). This year, Bob expects to have an income tax liability of $60,000. He also has estimated that the amount of income tax withheld from his wages will total $24,000. Determine the estimated tax liability for the current year that is not covered by withholding:
$60,000 Estimated tax liability for current year
- $24,000 Less estimated withholding
= $36,000 Estimated tax liability
Since Bob’s estimated tax payment will be greater than $1,000, Bob compares the amount of tax to be withheld ($24,000) with the lesser of the following:
8-11,12
- Estimated tax to be shown on the current year’s return and multiply by 90%
$60,000 * 90% = $54,000
or
- Tax shown on the previous year’s return Multiplied by 110%
$54,500 * 110% = $59,950
The lesser of these two amounts is $54,000. Bob’s withholding is estimated to be $24,000. Thus, he will need to make $30,000 of estimated tax payments to avoid the underpayment penalty.
Failure to File Penalty
Taxpayers who fail to file their income tax returns by or on the due date of the return (including extensions) are liable for the _____ penalty. This penalty is equal to 5% of the tax amount required to be shown on the return for each month (or fraction thereof) the return is not filed, up to a maximum of 25%. Taxpayers who fail to file their returns within 60 days of the due date (including extensions) must pay a minimum penalty equal to the lesser of:
$135,
or
100% of the tax required to be shown on the return.
The amount of tax required to be shown on the return may not be what is actually shown on the return if a taxpayer reported incorrect amounts.
a. Substantial Understatement
b. Civil fraud
c. Failure to File
d. Failure to Pay
e. Tax avoidance
f. Tax evasion
g. Negligence
8-11,12
c. Failure to File
Failure to File Penalty
Taxpayers who can show that the failure to file was due to “reasonable cause” and not “willful neglect” are not subject to the failure to file penalty. A list of reasonable causes commonly accepted by the IRS is presented following.
8-11,12
- The taxpayer’s records were destroyed.
- The return was filed on time but in the wrong district.
- The taxpayer, or someone in the taxpayer’s immediate family, died or was seriously ill.
The term “willful neglect” has two definitions, depending on the source. According to the First, Seventh, Eighth, and Ninth Circuits, some district courts, and the IRS, willful neglect means that the act was voluntarily, consciously, and intentionally committed. The Fifth Circuit has defined willful neglect to mean that the act was committed without reasonable cause.
- Sally Morton is a waitress who makes a significant amount of her income from tips. During the current year, Sally willfully underreported by 50% the amount of tips that she received.
Which one of the following penalties, potentially applicable to Sally, would be the most costly?
underpayment of estimated tax
civil fraud
late payment
negligence
civil fraud
