S10 Lecture Nov 2012

Category: Education

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Penalties TA 319 Session 10

IRC 6651(a)(1) Failure to File Return:

5% of tax due per month, up to 25% of the tax due Increased to 15% (max of 75%) when fraudulent failure to file Excusable for reasonable cause, and when not due to willful neglect IRC 6651(a)(1) Failure to File Return

IRC 6651(a)(2) Failure to Pay Taxes:

Applies when taxpayer reports an amount of tax due on the return but fails to pay it by the payment due date. ½% per month of the unpaid amount of tax shown on the return, up to max of 25% Penalty can apply to returns created under IRC 6020(b) (substitute for returns) IRC 6651(a)(2) Failure to Pay Taxes

IRC 6651(a)(3) Failure to Pay Taxes:

Applies when a taxpayer Fails to report an amount due on his return that should have been shown, and Does not pay within 21 calendar days from the date of notice and demand for payment (or 10 business days after the notice if the amount is for at least $100,000) ½% of the amount of tax stated in the notice and demand for each month that the failure to pay continues, up to 25% max IRC 6651(a)(3) Failure to Pay Taxes

Reasonable Cause:

Defense against the delinquency penalties. Examples Incapacity Reliance on IRS instructions Reliance on the advice of a tax professional Reasonable Cause

IRC 6662 Accuracy-Related Penalty:

20% penalty for: Negligence or disregard of rules or regulations Substantial understatement of income tax Substantial valuation misstatement Substantial overstatement of pension liabilities Substantial estate or gift tax misstatement 40% penalty for: Gross valuation misstatement of (3), (4), or (5) above IRC 6662 Accuracy-Related Penalty


Any failure to make a reasonable attempt to comply with the provisions of the IRC or to excise ordinary and reasonable care in the preparation of a tax return. IRC 6662(c) and Treas. Reg. 1.6662-3(b) No negligence if the return position has a “reasonable basis.” “Negligence”

ARP Defenses:

There was substantial authority for the taxpayer’s position There was a reasonable basis for the taxpayer’s position and it was disclosed. If the position relates to a reportable transaction, the position must also be disclosed on Form 8886. Treas. Reg. 1.6662-3 ARP Defenses

ARP Defenses:

Reasonable Cause – Reliance on a Tax Professional Must show taxpayer acted in good faith Taxpayer must prove that the advisor a competent professional who had sufficient expertise to justify reliance, The taxpayer gave to the advisor the necessary and accurate information, and The taxpayer relied in good faith on the advisor’s judgment. Neonatology v. Commissioner , 115 T.C. 43 (2000). ARP Defenses

Substantial and Gross Valuation Misstatement:

IRC 6662(e) and (h) Substantial valuation misstatement = 20% penalty Gross valuation misstatement = 40% penalty Substantial and Gross Valuation Misstatement

IRC 6663: Fraud Penalty:

75% penalty if any part of the tax requirement to be shown on a return is due to fraud. Reasonable cause exception applies. IRS’s burden to prove: IRC 7454(a) IRC 6663: Fraud Penalty

Reportable Transaction Penalties:

Penalties: IRC 6662A, 6707, 6707A A reportable transaction includes: Listed transactions Confidential transactions (requires minimum fee to advisors) Contractual protection transactions (with exceptions) Loss transactions (has $ thresholds) Transactions of Interest Reportable Transaction Penalties

IRC 6662A: Accuracy Related Penalty on Reportable Transaction Understatements:

Applies to understatements attributable to: Listed transactions Reportable transactions with a significant tax-avoidance purpose 20% penalty if disclosed, 30% if not disclosed For tax years ending after 10/22/04 IRC 6662A: Accuracy Related Penalty on Reportable Transaction Understatements

IRC 6707A: Failure to Include Reportable Transaction Information with Return:

Asserted for failure to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included. Penalty starts at $10,000 but can go higher IRC 6707A: Failure to Include Reportable Transaction Information with Return

Misc. Other Penalties:

Bad Check Penalty Frivolous Filing Penalty Misc. Other Penalties