Tax Penalties

Question 1

Late Filing or Failure to File Penalty:

Answer 1

-5% of the net tax due per month (up to 25%)

Example: Mary files her income tax form two months after the deadline. She owes $10,000 in tax. She must now pay the $10,000 in tax plus a $1,000 penalty.

Question 2

What is the fraudulent penalty?

Answer 2

• 15% per month up to 75% per month

Question 3

Late payment penalty?

Answer 3

0.5% of the net tax due per month up to 25%

Question 4

Understatement penalty- Individual:

Answer 4

GREATER OF:

• 10% of the tax
• $5,000

Example: Ted’s correct tax amount is $20,000 but Ted reported only $12,000. Understatement equated to $8,000.

1) 10% * 20,000= 2,000
2) 5,000

8,000 is greater than both. $12,000 * 20% = 1,600

Question 5

Understatement penalty- Corporation:

Answer 5

Lesser of:

• 10% of the tax
• $10,000,000

Example: Correct tax amount is $200,000, but it reported only $140,000. Difference is $60,000.

1) 20,0000
2) 10,000,000

Penalty: 60,000 * .2= 12,000

Question 6

Substantial Understatement- amount can be reduced if:

Answer 6

1) If the claim had substantial authority. Greater than or equal to 40% of being sustained.
2) The relevant facts affected the tax treatment are adequately disclosed and there is a reasonable basis for the tax treatment (greater than 20% chance of being sustained)

Question 7

Reasonable cause Defense to avoid understatement:

Answer 7

if the understatement is due to reasonable cause AND good faith, you will NOT get hit with the understatement penalty.

• Examples: Reliance on a tax advisor, reliance on IRS employee, death or illness with a family member, etc.

TAX SHELTER: More Likely than not that it would be upheld!

GOOD FAITH= honesty of purpose. Judged subjectively.