Chapter 9 - Penalties & Other Tax Issues

Preparer penalties - Endorsing or negotiating taxpayer's refund check

$520 per check (2019) - unlimited

Preparer penalties - Improper disclosure of return information

$250 for each disclosure, maximum of $10,000: Criminal penalty of up to $1,000 or 1 year in prison, or both

Individuals - Exceptions to the estimated tax payment penalty

*Prior year tax liability - No penalty is assessed if the withholdings and estimated payments totaled at least 100% of the prior year tax liability, unless the taxpayer had more than $150,000 of AGI in the prior year, then the taxpayer must pay 110% of prior year to avoid penalty this year. *Annualized income method *Current tax liability - No penalty is assessed if the payments covered at least 90% of the current tax liability

Corporate - Exceptions to the estimated tax penalty/unterpayment

*Small balance - the total underpayment is less than $500 *Annualized Income *Seasonable method *Previous year - The payments equal at least 100% of the prior year tax liability Note: The last exception will not escape penalty, if; -There was no tax liability in the previous years, or -the corporation had taxable income exceeding $1 million in any of the preceding 3 tax years

Corporate requirements - estimated tax payments and underpayment penalties

A corp is required to make quarterly estimated tax payments during the tax year, and is subject to a penalty for underpayment of taxes if the tax liability has not been paid in 4 equal installments over the course of the tax year. The quarterly estimated tax payments are due by the 15th day of the 4th, 6th, 9th, and 12th month of taxable year

Controlled Foreign Corporation (CFC)

A foreign corp where US shareholders own more than 50% of the total voting power or value of all classes of the corp's stock

If a prepare adopts a non-frivolous position

Non-frivolous position (ie there is a reasonable basis for the position) in the tax treatment of an item that fails to meet the substantial authority standard, no penalty is assessed against the preparer if the position adopted is disclosed on the return.

Offers in compromise

Offers in compromise can be filed by a taxpayer to obtain a reduction in the amount of tax owed. The IRS will consider an offer in compromise if one of the following applies: *The amount owed, or whether it is owed, is in doubt *The taxpayer's ability to pay the amount owed in doubt *The taxpayer would suffer an economic hardship if required to pay the entire amount *The IRS determines that the case presents compelling reasons that are a sufficient basis for compromise

Length paid preparer must keep client data

The preparer must retain either documentation of the taxpayer's name and tax ID or a copy of the prepared return for 3 years.

Preparer penalties - Failure to sign return

$50 per return/ up to $26,000 yr

3 courts that will initially hear a tax claim

1) US Tax Court 2) US Court of Federal Claims 3) US District Court

Interstate Income Act of 1959

Allows a business to go, or send a rep, into a state to solicit orders for goods without being subject to a net income tax. (goods must be shipped from outside the state)

Preparer penalties - Undisclosed position lacking substantial authority

Greater of $1,000 or 50% of return prep fee

Preparer penalties - Preparer's reckless or intentional disregard of rules or regulations

Greater of $5,000 or 75% of return prep fee

Preparer penalties - Fraudulent or deceptive conduct, including misrepresenttions of eligibility to practice before the IRS

The courts may enjoin such person from further engageing in such conduct

Preparer penalties - Failure to furnish copy of return to taxpayer

$50 per return / up to $26,000 yr (2019)

Client data is confidential. CPA can reveal client info without approval in these cases:

*To respond to a valid government order *As part of a quality control peer review progran *To permit the electronic preparation or submission of the taxpayer's return *To secure legal advice from an attorney

Penalties are assessed against preparers who knowingly or recklessly:

*understate the tax liability of a client *giving erroneous advice or fail to advise a client of tax elections available *endorse or negotiate a refund check for their own account *adopt a frivolous position on a tax issue ($5,000 penalty)

Late payment penalty

.05% for each month, or part of a month, after the due date 4/15 that the tax is not paid, up to a total 25% of the unpaid tax. (If same month has late filing pentaly, the late filing penalty is reduced by the late payment penalty so that the max penalty is 5% per month, or part of a month)

Base Erosion and Anti-Abuse Tax (BEAT)

Even with the Participation Exemption and these lower FDII and GILTI tax rates, corp's will sill have the incentive to shift their profits to countries with lower tax rates, thus, TCJA also created an additional base erosion minimum tax called "BEAT" to protect against erosion of the US tax base. *Only applicable to corps with $500 million or more in average annual gross receipts over the previous 3 years. BEAT = 10% x Modified Taxable Income - (Regular Tax Liability - Certain Tax Credits) Modified Taxable Income = generally any amount paid or accrued to a foreign related party

Global Intangible Low-Taxed Income (GILTI)

New reduced tax rate for domestic corps - 10% New, wide-ranging category of income designed to tax foreign income at a low rate immediately (rather than it being deferred)

Preparer penalties - Failure to retain a copy of return for 3 years or maintain a list of names and ID numbers of the taxpayers for whom the returns were prepared

$50 per preparer / up to $26,000

Preparer penalties - Failure to retain and make available a list of the tax return preparers employed

$50 per preparer / up to $26,000

Preparer penalties - Failure to furnish identifying number of preparer on return

$50 per return/ up to $26,000 yr

Undiscloused, non-frivolous penalty

A prepare is subject to a penalty equal to the greater of $1,000 or 50% of the income derived by the preparer with respect to the return or refund claim if any part of an understatement of liability is due to an undisclosed position on the return for which there is not a reasonable belief that the position backed by substantial authority.

US shareholder

A shareholder is considered a US shareholder if they own 10% or more of total voting power of all classes of stock, or 10% or more of the total value of all classes of stock in the foreign corp

Accuracy-related penalties

20% of the underpayment applies under Sec 6662 if the underpayment of tax is attributable to negligence or disregard of rules and regulations, any substantial understatement of income tax (ie generally more than the greater of 10% or $5,000 for individuals)

Foreign branch

A business operation carried on by a US corporation, partnership, trust, estate, or individual, outside the United States. Such an activity must be considered a permanent establishment under the terms of a treaty between the US and foriegn country *Taxed on current US income and losses are deductible (extension of US office)

Late filing penalty

Based on the net amount of unpaid tax by the tax return filing due date (april 15th). The penalty is 5% per month, or part of a month, that the return is late, up to a total of 25% of the unpaid tax. (if same month has late payment penalty, the late filing is reduced by late payment. Each month cannot exceed 5% per month)

Tax Shelters

Certain activities are listed as "reportable transactions" under the federal tax code and must be specifically disclosed when the return is filed. These include all registered tax shelters as well as any special arrangement that changes reportable income by more than $10 million. Penalties apply for the failure to disclose such activities, even when there is no determination of an underpayment of taxes. Such activities must also meet the higher standard of "more likely than not" to succeed on its merits for the preparer to avoid penalty under Sec 6693 for understatement of a taxpayer's liability.

Individuals - Estimated tax payments and underpayment penalties

If estimated tax payments are required, they are due by the 15th day of the 4th, 6th, and 9th month of calendar year and then 15th of Jan of next year. An individual is only subject to an underpayment penalty if the balance due on the tax return is greater than $1,000. Even then, there are certain exceptions.

Corporate - Interest and penalties on tax payment if not paid by the original due date

If the entire tax liability is not paid by the original due date of the return, interest will be owed to the IRS on the unpaid balance. In addition, if the amount paid by the original due date is less than 90% of the total tax liability, a monthly delinquency penalty will be owed in addition to the interest charges.

Foreign base company services income

Income from the performance of services by or on behalf of a related person

Foreign base company sales income

Income received by a CFC from the purchase or sale of personal property involving a related person Income earned by a CFC that results from the purchase/sale, from or on behalf of a related party, of property that is manufactured, produced, or extracted outside of the county of the CFC's org, and is sold for use, consumption, or disposition outside of the country of its org (made and sold outside of CFC and US is shielding income)

Participation Exemption

New ITAX rule A new 100% dividends received deduction (DRD) that is generally available for the foriegn-source portion of dividends received after 2017 from a "specified 10% owned foreign corp" by domestic corps that are at least 10% shareholders. *must hold longer than 365 *cannot use foreign tax credit or deduction for these dividends

Foreign-Derived Intangibles Income (FDII)

New reduced tax rate for domestic corps - 12.5% FDII is intangible income (ie income from the ownership, sale, etc of intangible assets), derived from serving foreign markets.

Nexus

Nexus is generally created for income tax purposes when an entity derives income from sources within the state, has employees in the state engaged in activities other than solicitation, or has capital or property in the state. 1) Sales 2) Payroll 3) Property

Substantial authority definition

Standard requires about 40% probability of being sustained on its merits, in contrast to the more likely than not standard, which requires a 50% likelihood of success, and the realistic possibility standard, which requires 33% success. Penalty avoided if *disclose the questionable position on the return * showing that there was a reasonable basis for the position. *the reasonable basis standard may require at least a 20% probability of being sustained on its merits *Preparer can show a reasonable cause for the understatement and that the return preparer acted in good faith

Foreign personal holding company inocme

investment income such as dividends, interest, rents and royalties