Taxpayer penalties

Question 1

corporation underpayment

Answer 1

A corporation generally must pay four installments of estimated tax, each equal to 25% of its required annual payment. A penalty for the underpayment of estimated taxes can be avoided if a corporation’s quarterly estimated payments are at least equal to the least of (1) 100% of the tax shown on the current year’s tax return, (2) 100% of the tax that would be due by placing the current year’s income for specified monthly periods on an annualized basis, or (3) 100% of the tax shown on the corporation’s return for the preceding year. However, the preceding year’s tax liability cannot be used to determine estimated payments if no tax liability existed in the preceding year or a short-period tax return was filed for the preceding year

Question 2

late filing or fail to file penalty

Answer 2

1. Penalty is 5% of the net tax due per month (up to 25% of unpaid taxes).
2. If the failure to file is fraudulent, the penalty becomes 15% per month (up to 75% of unpaid taxes).

Question 3

late payment tax penalty

Answer 3

Penalty is 0.5% of the net tax due per month (up to 25%).

Question 4

understatement penalty

Answer 4

The key statute (26 U.S.C. 6662) imposes an accuracy-related 20% penalty on taxpayers for the following underpayments:
- The key statute (26 U.S.C. 6662) imposes an accuracy-related 20% penalty on taxpayers for the following underpayments:
= “Disregard” may be negligent, reckless, or intentional.
Negligent and reckless disregard largely overlap with the “negligence” provision of the statute.
Intentional disregard may be problematic but is not necessarily wrongful just because the taxpayer takes a tax position that is ultimately found to be erroneous. A “good-faith” mistake of law provides a defense.
Disclosure of a position on a Form 8275 or 8275-R may provide a defense to any penalty for intentional disregard if the position has a reasonable basis and the taxpayer has kept adequate books and records to properly substantiate necessary items.

Question 5

Any Substantial Understatement of Income Tax

Answer 5

1. For individuals, a “substantial understatement” is one that exceeds the greater of:
   10% of the tax, or
   $5,000.
2. For non–Subchapter S corporations, a “substantial understatement” is one that exceeds the lesser of:
   10% of the tax (or, if greater, $10,000), or
   $10 million.
3. An “understatement” is reduced by the amount attributable to either:
   Any item for which there is or was “substantial authority” for the claimed tax treatment.
   “Substantial authority” is an objective standard requiring that the weight of authorities supporting the claimed position is substantial in relation to the weight of authorities opposing it.
   Tax practitioners tend to think of “no substantial authority” as there being <40% chance of the position being sustained if challenged before the IRS.
   Authorities that count include, among others, the IRC, regulations, revenue rulings and procedures, court cases, and congressional intent as reflected in committee reports.
   Any item if:
   The relevant facts affecting the tax treatment are adequately disclosed (typically on a Form 8275 or 8275R); and
   There is a “reasonable basis” for the tax treatment.
   Because disclosure calls the IRS’s attention to the position and makes it clear that the taxpayer is not trying to sneak it by, a more lenient standard is applied in determining “unreasonableness.”
   Tax practitioners tend to think of a position as having “no reasonable basis” if there is <20% chance of it being sustained if challenged.

Question 6

Belief requirement for reasonable cause related to tax positions

Answer 6

Undisclosed position—“Substantial authority” (≥40% chance)
Disclosed position—“Reasonable basis” (≥ 20% chance)
Tax shelter position—“More likely than not” (>50% chance)

Question 7

fraudulent underpayment

Answer 7

Obviously there is no reasonable cause or good-faith defense when a taxpayer attempts to commit fraud. A 75% (of the portion of underpayment) civil penalty applies to fraudulent underpayments (26 U.S.C. 6663).
When the underpayment is allegedly fraudulent, the 75% penalty applies to the return’s entire understatement, unless the taxpayer can establish that parts of it were not attributable to fraud.