Tax Payer Penalties

Question 1

T/F: A cash basis taxpayer is allowed to deduct unpaid expenses?

Answer 1

FALSE: a cash basis taxpayer is NOT allowed to deduct unpaid expenses.

Question 2

Name all the following cases where a 20% underpayment penalty applies.

Answer 2

1. Negligence or disregard for rules
2. Any substantial understatement of income tax
3. Any substantial valuation misstatement for calculating taxes
4. Any substantial overstatement of pension liabilities
5. Any substantial estate or gift tax valuation understatement

Question 3

What are the different types of IRS audits

Answer 3

1. Correspondence Audit - conducted via mail
2. Criminal Investigation - fraud/tax evasion
3. Taxpayer Compliance Measurement Program - Sampling
4. Field Audit - TaxPayer’s residence/place of business
5. IRS office audit - conducted in IRS office

Question 4

What are the types of cases where a 40% underpayment penalty applies?

Answer 4

1. Gross valuation misstatement
2. Underpayment attributable to undisclosed transactions lacking economic substance
3. an understatement involving an undisclosed foreign financial asset.

Question 5

What is the rule for a substantial understatement of income tax?

Answer 5

For individuals it is the greater of 10% of the tax shown or $5,000.
For corporations it is the lesser of 10% of the tax shown or 10,000,000.