TBS 1

Question 1

Monica Green, a CPA sole practitioner, prepares tax returns each year for individual and business clients.

One of her clients is Doug Devona, a very successful business owner. In 2019, Doug’s individual tax return reflected taxable income of $230,000. Upon audit of his return by the Internal Revenue Service in 2020, the IRS concluded that Doug’s actual taxable income was $320,000. The $90,000 of additional income was due to the underreporting of $90,000 of income received in 2019. The additional tax due on this income is $32,000. Monica’s fee for this engagement was $1,000.

1. Assume that it is determined that the position taken on Doug’s return did not have a reasonable basis and that Monica did not act in good faith and there was no reasonable cause for the understatement. However, her actions were not willful. She did not disclose that this position had been taken on the return. What will be the amount of Monica’s penalty, if any?

Answer 1

$1,000

1. A tax return preparer, who prepares a return or refund claim, which includes an “unreasonable position,” must pay a penalty of the greater of $1,000 or 50% of the income derived by the preparer for preparing the return (50% × $1,000 = $500). A position is unreasonable if there is not substantial authority for it. There is an exception to this rule if the position was disclosed and there is a reasonable basis for it.

Question 2

Monica Green, a CPA sole practitioner, prepares tax returns each year for individual and business clients.

One of her clients is Doug Devona, a very successful business owner. In 2019, Doug’s individual tax return reflected taxable income of $230,000. Upon audit of his return by the Internal Revenue Service in 2020, the IRS concluded that Doug’s actual taxable income was $320,000. The $90,000 of additional income was due to the underreporting of $90,000 of income received in 2019. The additional tax due on this income is $32,000. Monica’s fee for this engagement was $1,000.

2. Assume that it is determined that the position did not have a reasonable basis and Monica willfully attempted to understate the tax liability and recklessly disregarded tax rules. What will be the amount of Monica’s penalty, if any?

Answer 2

$5,000

2. If the understated tax liability is due to an unreasonable position and the preparer willfully attempts to understate the tax liability or recklessly or intentionally disregards rules or regulations, the penalty is the greater of $5,000 or 75% of the income earned by the tax preparer for preparing the return or claim (75% × $1,000 = $750).

Question 3

Monica Green, a CPA sole practitioner, prepares tax returns each year for individual and business clients.

One of her clients is Doug Devona, a very successful business owner. In 2019, Doug’s individual tax return reflected taxable income of $230,000. Upon audit of his return by the Internal Revenue Service in 2020, the IRS concluded that Doug’s actual taxable income was $320,000. The $90,000 of additional income was due to the underreporting of $90,000 of income received in 2019. The additional tax due on this income is $32,000. Monica’s fee for this engagement was $1,000.

3. Assume that it is determined that the position taken on Doug’s return did have a reasonable basis and that Monica did act in good faith. Her actions were not willful and she appropriately disclosed the position on Doug’s return. What will be the amount of Monica’s penalty, if any?

Answer 3

$0

3. Monica will have no penalty. If a preparer takes a position on a return that understates the true tax liability, the preparer will not be subject to a penalty if the position taken has substantial authority. However, if the position is disclosed on the return on Form 8275, then no penalty is assessed as long as there is a reasonable basis for the position.