Tax R Ch. 13

Willful understatement

-preparer's willful attempt in any manner to understate the liability or to the reckless or intentional disregard of IRS rules or regulations -A preparer is considered to have willfully attempted to understate the tax in this manner if he or she *disregards information that has been supplied by the taxpayer, or by any other person, in an attempt to wrongfully reduce the taxpayer's levy.* -The penalty is computed as the *greater of $5,000 or one-half the return preparer's related fees.*

Relief from Joint and Several Liability

1.) Request *"innocent spouse" relief* under the provisions of § *6015(b).* 2.) Request an *allocation of liability* between the spouses under § *6015(c) or § 6015(d).* 3.) Request *equitable relief* under § *6015(f)*.

Lack of reasonable cause:

A lack of reasonable cause is to *act differently than an ordinary, intelligent person* under similar circumstances through *negligence or fraud*

Failure to pay Tax Penalty

A penalty imposed on taxpayers who fail to pay a tax that is shown on their return. The penalty is *generally 0.5 percent of the required liability for each month that the tax is not paid*, up to a *maximum penalty of 25 percent.* (This penalty does not apply if the failure to pay is attributable to a reasonable cause or to the failure to pay an estimated tax for which there is a different penalty.)

Penalties: Failed, because of *pressing time conflicts*, to conduct the usual review of the client's tax return. The IRS discovered a *mathematical error in the computation of the taxpayer's standard deduction.*:

A tax advisor *would not receive a penalty* for understatements due to a mathematical error because *understatements due to an unreasonable position does not apply in this case*

Penalties: Suggested that the client invest in a real estate tax shelter.:

A tax advisor cannot be charged for suggesting that a client invest in a real estate tax shelter

Penalties: Provided a statement of assurance as to the accuracy of the financial data that are included in the prospectus of a real estate tax shelter.

A tax advisor could *potentially be charged with a civil penalty* for organizing (or assisting in doing so) or *promoting* and *making or furnishing statements* with respect to *abusive tax shelters*

Penalties: Suggested to the promoters of a real estate tax shelter that a specific accounting technique, not recognized by generally accepted accounting principles, should be used to construct the prospectus.:

A tax advisor could *potentially be charged with a civil penalty* if the *prospectus* was *wrong as a result* of adopting that accounting method.

Ad valorem tax

are *additions to taxes* that are based on a *percentage* of the *delinquent tax.*

Valuation Understatement Penalty:

tests: (1) situations in which the claimed value is 65 percent or less than the asset's actual value, (2) resulting in an underpayment of more than $5,000. *Results in a 20% transfer-tax valuation-understatement penalty* -*40 percent penalty* if claimed value is *40 percent or less than correct value* (40% Penalty applies to ANY portion of underpayment of: §*Lacks economic substance under IRC §7701(o)* §*Fails to meet the requirements of any similar rule of law* §*Is a foreign financial asset understatement*)

What is the period of time for which the IRS may refund an overpayment without paying interest?

the government will owe the taxpayer interest if the refund is not paid within *45 days*

Substantial Understatement

−Income tax understatement exceeds *greater of 10 percent of tax liability, or $5,000* -*Corporate income tax* understatement exceeds *greater of 10 percent of tax liability, or $10,000* −*Except* if corporate income tax understatement *exceeds $10 million*, then *penalty applies, regardless of what percentage of tax is represented*

Substantial portion safe harbor

−Not substantial portion if schedule, entry, dollar amounts are: ---> *Less than $10,000*, or ---> *Less than $400,000* and also *less than 20 percent of AGI*

Discuss the penalties imposed on TRPs.

*-Penalties range from $50 to $1,000* -*A penalty of $50* for each return may be imposed on a TRP if the taxpayer is n*ot given a complete copy of the return* when it is presented to him or her for signature. -*A penalty of $50* for each return may be imposed on a TRP if he or she *fails to sign the return.* -*A penalty of $50* for each return is imposed on a TRP if the *preparer's identification number or that of his or her employer, or both, is not listed* on each completed return. -*A penalty of $50* for each failure is imposed on a TRP if he or she *does not retain a copy of all returns he or she prepared*. Alternatively, he or she may retain a list of all the taxpayers, including their identification numbers, for whom returns were prepared for the previous three years. -*A penalty of $50 for each failure to retain, and $50 for each item that is omitted*, is imposed on a TRP who does not retain records that indicate the name, identification number, and place of work of each preparer who is employed during the 12-month period that begins on July 1 of each year. -*Maximum $27,000 per year, per penalty in 2021*

Injunction

*A judicial order that prohibits the named person from practicing as TRP or engaging in specific activities* Preparer must have: −Violated a preparer penalty or criminal provision of the IRC −Misrepresented his or her eligibility to practice before the IRS −Guaranteed payment of any tax refund or allowance of a credit −Engaged in other fraudulent or deceptive conduct that substantially interferes with administration of tax laws

Accuracy Related Penalty

*Amounts to 20 percent of the portion of the tax* underpayment that is attributable to one or more of the following: -*Negligence* or disregard of applicable federal tax rules and regulations. -*Substantial understatement* of *income tax.* -*Substantial valuation overstatement.* -*Substantial overstatement of pension liabilities.* -*Substantial understatement of estate and gift tax valuation.* -*Disallowance of claimed tax benefits by reason of a transaction lacking economic substance* (within the meaning of IRC § 7701(o)) or failing to meet the requirements of any similar rule of law. -*Any undisclosed foreign-financial-asset understatement.*

What is joint and several liability?

*Each taxpayer is legally responsible for the entire tax*, including any interest and penalties assessed on a jointly filed return.

Penalties/Criteria

*Overstatement*= 2 tests: (1)Valuation used is 150% or more (2) resulting in an underpayment of over 5,000. Results in a 20% Penalty *Understatement*= 2 tests: (1) situations in which the claimed value is 65 percent or less than the asset's actual value, (2) resulting in an underpayment of more than $5,000. Results in a 20% transfer-tax valuation-understatement penalty *Negligence penalty= 20% penalty* *Fraud Penalty= 75% penalty* *Annualizing the income tax= Projected tax liability/4 quarters x 90%*

May penalties be deducted on a tax return?

*Penalties are not deductible*

White Corporation estimates that its 2021 taxable income will be $800,000 and its tax liability will be $168,000. For each of the following independent cases, compute the minimum quarterly estimated-tax payments that will be required to avoid an underpayment penalty.

*White Corporation's 2020 tax return showed taxable income of $700,000 and a tax liability of $147,000.* An underpayment penalty will not apply as long as White Corporation pays in at least 100% of its 2020 tax liability of $147,000 or $36,750 each quarter Proper year method= ($147,000/4)*100%= 36,750 each quarter *White Corporation's 2020 tax return showed a net loss and $0 tax liability for the year.* White must pay in 100% of the current year tax or $42,000 per quarter, *an individual can avoid the estimated-tax-underpayment penalty if the preceding taxable year included 12 months, the individual did not have any tax liability for the preceding year, and he or she was a citizen or resident of the United States throughout the preceding taxable year.*

Who is a preparer, what is defined as a tax return preparation, and what is not considered preparation?

-*A preparer is a person who prepares a tax return for compensation*, or employs one or more persons to prepare for compensation. -*A TRP is defined as any person who prepares for compensation,* or employs one or more persons to prepare for compensation *(substantially all), all or a substantial portion of a tax return or a claim* for income tax refund. -*A tax return preparation includes preparing all or a substantial portion of a tax return.* -If the person prepares less than a substantial portion of the return or does it gratuitously, then they are not a tax return preparer. -*List of functions that does not make a person a TRP*

Interest

-*Applied to the deficiency or tax due* −Federally specified rate ---> *Adjusted quarterly* −*Compounded daily* −*Computed on amount due from date of assessment (or due date of return)* −Also computed on added civil penalties

Other Taxpayer Civil Penalties

-*Failure to make deposits of withheld employee taxes* --->*2 to 15 percent* of underpayment, depending on when failure is corrected ---> Criminal penalties may also apply -*False withholding or exemption information* ---> *$500 penalty* -*Filing a frivolous return*—return takes positions that are meant to impede administration of tax law ---> *$5,000 penalty* -*Reliance on written advice from the IRS* ---> *Penalty abated if relied on erroneous written advice* from the IRS specifically requested by taxpayer ---> *Not abated if error is due to taxpayer not providing all information*

Reliance on Written Advice

-*The Secretary of the Treasury must abate any civil penalty or addition to tax that is attributable to the taxpayer's reliance on erroneous written advice furnished by an IRS officer or employee.* -This abatement is available *only with respect to advice given in response to a specific request by the taxpayer*, and it is negated if the IRS error was made as a result of a lack of information provided by the taxpayer -There is *no abatement of a penalty* on the taxpayer for the *reliance on general information published by the IRS*

Failure to Make Estimated Payments

-A penalty is imposed on both individuals and corporations that *fail to pay quarterly estimated income taxes.* -*Penalty is computed without any daily compounding and is not deductible.* -*Penalty based on underpayment for each quarter* and the *applicable current interest rate* ---> If "*under withheld*" tax greater than or equal to *$1,000* -Safe harbor estimated payments for individuals −--> *100 percent of prior year tax* reported on a 12-month return ----> *Or 110 percent of prior year tax* where individual's *AGI greater than $150,000* (*$75,000 if married* filing separately) --->*90 percent of current year tax*, or ----> *90 percent of tax based on annualized income*

Substantial Authority

-Amount subject to *penalty is reduced if taxpayer has substantial authority* -Substantial authority is often defined as having at least a *40 percent probability of a position succeeding* on it merits. -A taxpayer penalty may be incurred if a tax return position is taken and not disclosed to the IRS and no substantial authority (*generally, statute, regulation, court decision, or written determination*) supports the position. =•Makes full disclosure of position on Form *8275 or 8275-R*

Mimi had $40,000 in federal income taxes withheld in 2019. Because of a sizable amount of itemized deductions, she figured that she had no further tax to pay for the year. For this reason and because of personal problems, and without securing an extension, she did not file her 2019 return until July 1, 2020. The return showed a refund of $2,400, which Mimi ultimately received. Due to some additional changes on her return, on May 10, 2023, Mimi filed an amended return requesting an additional $16,000 refund of her 2019 taxes.

-How much of the $16,000 will Mimi rightfully recover? $0, The IRS provides a *3 year grace period to claim the refund from the last date of filing the tax return*. In this case the due date to file the return would be April 15th, 2020. Since she filed for the claim after this date she will not be able to recover the full $16,000 -How would your analysis differ if Mimi had secured from the IRS an *automatic six-month* extension of time for filing her 2019 return? In this case, Mimi would still be *able to claim the refund because she would be in the time period limit with the extension.* She would be able to recover the full $16,000.

Cival Fraud

-If any part of an underpayment of tax is *attributable to fraud*, a substantial civil penalty is imposed. -*75 percent of the underpayment that is attributable to the fraud.* -*Under an all-or-nothing rule*, if the IRS establishes that any portion of an underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud, and the *penalty applies to the entire amount due.* -Burden of proof for fraud is on the IRS

The minimum failure to file

-If the taxpayer's failure to file is because of willful neglect, there is a *minimum penalty for a failure to file an income tax return within 60 days of the due date*, including extensions. Effective for returns due on or after January 1, 2020, this minimum penalty is the *lesser of $435, or the full amount of taxes that are required to be shown on the return.*

Failure to File a Tax return

-Penalty is *5 percent* of the amount of the tax, less any prior payments and credits, for each month (or fraction thereof) that the return is not filed. -The *maximum penalty that may be imposed is 25 percent* (or five months' cumulative penalty). -*A fraudulent failure* to file is subject to a *15 percent* *monthly penalty,* to a *75 percent maximum*

Criminal Penalties:

-intended "to prohibit and punish fraud occurring in the assessment and collection of taxes." -*imposed only after the implementation of the constitutional criminal process,* -*limited to flagrant offenses* for which the IRS believes it is virtually certain to obtain a conviction -criminal prosecutions are limited to cases in which the *additional tax that will be generated from a successful prosecution is substantial, the crime appears to have been committed in three consecutive years, or the taxpayer's flagrant or repetitive conduct was so egregious that the IRS believes that it is virtually certain to obtain a conviction* -*Penalties for individuals from $1,000 to $100,000 plus court costs* ---> Up to *$500,000 for corporations* ---> *Imprisonment not to exceed five years* -*If a taxpayer is convicted of criminal fraud* under § *7201*, he or she *CANNOT contest a civil fraud determination.* -The taxpayer is "*collaterally estopped*" from arguing that the civil fraud penalty should not also apply. However, if the taxpayer is *convicted of criminal fraud* under § *7206,* he or she *may then contest the civil fraud penalty* (•Not mutually exclusive of civil penalties)

Valuation Overstatement Penalty:

2 tests: (1)Valuation used is 150% or more (2) resulting in an underpayment of over 5,000. *Results in a 20% Penalty* (The rate of both penalties is *40 percent if a gross valuation misstatement is made*; that is, the income tax valuation was at least *200 percent of actual value or the transfer tax value was 40 percent or less of actual value*)

Request an allocation of liability between the spouses under § 6015(c) or § 6015(d).: and Request equitable relief under § 6015(f).:

2.) Request an allocation of liability between the spouses under § 6015(c) or § 6015(d).: This relief is for separate liability because the parties are no longer married, the non requesting spouse is dead, the parties are legally separated, or the parties have been living apart from one another for a period of 12 months from the date that the return was filed. The requesting spouse has the burden of showing the amount of any deficiency that should be allocated to him or her. 3.) Request equitable relief under § 6015(f).:If relief is unavailable under § 6015(b) or (c), a taxpayer may be eligible for relief under § 6015(f) if it would be otherwise inequitable to hold the taxpayer liable for the underpayment or deficiency considering the facts and circumstances. § 6015(f) also provides relief from under payments of tax. two-year deadline for filing for equitable relief found in § 6015(b) and § 6015(c) does not apply to § 6015(f), instead equitable relief may be filed in a 10 year window.

Negligence:

Any *failure to make a reasonable attempt to comply* with provisions of the code −Negligence includes *failure to (i) keep adequate books and records; (ii) maintain substantiation; (iii) make reasonable attempt to determine correctness of deduction that is "too good to be true"*

T/F An extension of time for filing a return results in an automatic extension of the time in which the tax may be paid.

False: the *tax is always due* when when the *return is initially due* (regardless of an extension)

Penalties: Failed, because of *pressing time conflicts*, to conduct the usual review of the client's tax return. The *IRS discovered that the return included fraudulent data.:*

If any part of an understatement of liability with respect to an income tax return is due to a position for which there was *not a realistic possibility of being sustained on its merits,* a tax return preparer who k*new or should have known of such a position* is subject to a *penalty of the greater of $1,000 or one-half of the preparer's fees for the engagement.*

The IRS can waive the estimated-tax-underpayment penalty

If the failure to make the payment was the result of a *casualty, disaster, or other unusual circumstance* such that it would be inequitable to impose the penalty. The IRS can also waive the penalty if the failure was the *result of reasonable cause* rather than willful neglect during the first two years after the taxpayer retires after reaching age 62, or becomes disabled. The fourth installment penalty is waived if the *corresponding tax return is filed with full tax payment by the end of the first month after the tax year-end* (January 31 for calendar-year taxpayers).

Civil penalty conviction:

Must show that the taxpayer attempted to intentionally defraud the government. The standard that must be met is "*clear and convincing evidence.*"

Reasonable cause:

No statutory or administrative definition exists for the term "reasonable cause." However, some courts define it to include such action as *would prompt an ordinary, intelligent person to act in the same manner as did the taxpayer under similar circumstances.*

Assessable Penalties

Penalties expressed as a *flat dollar amount* rather than a percentage of the delinquent tax. (e.g., *tax return preparers, tax shelter promoters, and information providers)*.

Prepare Conduct Penalties

The IRC contains a number of civil and criminal penalties that may be *imposed on return preparers as a result of misconduct.* The civil penalties were added to the code because Congress found that a significant number of return preparers were engaging in improper practices, such as guaranteeing refunds or having taxpayers sign blank returns. Civil: -*Endorsing or negotiating a refund check.* -*Understatements due to unreasonable positions.* -*Willful understatement of tax liability.* -*Organizing, assisting in organizing, or promoting and making or furnishing statements with respect to an abusive tax shelter.* -*Aiding and abetting the understatement of a tax liability.* Criminal: *felony* and is subject to imprisonment for up to three years and a *fine not exceeding $100,000 ($500,000 for corporations)*. This is one of the most severe tax-preparer penalties under the IRC

Signing + Non-signing TRP

The regulations distinguish between the *signing preparer who has primary responsibility* for the overall accuracy of the return and *non-signing preparers *who *prepare substantial portions* of a return or claim for refund.

Innocent Spouse Relief from Joint and Several Liability Under § 6015(b)

The requesting spouse must show: -*A joint return has been made for a taxable year*; -There is an *understatement of tax attributable* to erroneous items of one individual filing the joint return; -The other individual filing the joint return establishes that in signing the return, *he or she did not know, and had no reason to know, that there was such understatement;* -Taking into account all the facts and circumstances, it is *inequitable to hold the other individual liable for the deficiency in tax* for such taxable year attributable to such understatement; and -*The innocent spouse seeks the benefits of this subsection not later than the date which is two years after the date the secretary has begun collection activities* with respect to the individual making the election. -*Requesting spouse must prove by preponderance of evidence*

Criminal penalty conviction:

The same as the civil penalty conviction, except the standard is "*beyond a reasonable doubt.*"

Fraud:

not defined in the IRC or the regulations but can be defined as an *actual, intentional wrongdoing* ... the intent required is the specific purpose to evade a tax believed to be owing