Penalties and Defenses Chapter 11 pp

Penalties and Defenses Chapter 11 pp. 363-397
2016 National Income Tax Workbook™

p. 370 Failure to Pay/Failure to File
Apply to income, estate, gift, employment, self-employment, and certain excise taxes Timely mailing (postmark) = timely filing if Deposited in mail in US on or before due date Envelope is properly addressed Envelope contains sufficient postage Envelope was deposited with USPS or designated private delivery service

Due date on Saturday, Sunday, or legal holiday → due next succeeding day that is not a Saturday, Sunday, or holiday Extension to file eliminates FTF penalty Without payment, still subject to FTP Pay ≥ 90% by original due date → no FTP FTF and FTP automatically calculated and assessed when return processed

PINEX report from IRS to see computation FTF 5% x unpaid tax per month/part of month late Max 25% of tax unpaid at due date 2016 on: If > 60 days late, minimum FTF is lesser of $205 or 100% of unpaid tax on return If FTF fraudulent 15%/month, max 75%

FTP .5% x unpaid tax per month/part of month late Max at 25% x unpaid tax Increases to 1% per month/part of month if unpaid balance from notice CP504 (25% max) Timely filed with installment agreement - .25% per month/part of month agreement in effect

p. 371 Unpaid Taxes & Passports
2015 Fixing America’s Surface Transportation Act Authorizes IRS to certify serious delinquent tax debt to the Secretary of State – liability that IRS assessed and it > $50,000, IRS filed Notice of Federal Tax Lien, & TP’s right to hearing on lien has been exhausted/lapsed or IRS issued levy IRS must give notice to taxpayer

pp. 371-372 Failure to Pay/Failure to File
FTF and FTP assessed for same month FTF penalty reduced by FTP penalty FTF max: 22.5% Max for both: 47.5% No reduction if minimum FTF applies Waiver of FTF and FTP Reasonable cause - ordinary care & prudence FTP – also if undue hardship to pay First-time abatement (FTA) admin waiver

Policy Statement 3-2 – Reasonable Cause TP/immediate family died/serious illness TP unavoidably absent Place of business/business records destroyed Unable to determine amount due for reasons beyond TP’s control Ability to deposit impaired by civil disturbance Lacks funds to pay despite care/prudence

pp. 372-373 Failure to File Partnership Return
$195 per partner per month/month part late Max of 12 months Small partnership - ≤ 10 PNs, certain PNs Reasonable cause, Rev. Proc 84-35 PNs are individuals (not NR alien) or PN estates PNs capital/profits interest = no special alloc. All PNs fully reported PS items on returns Reasonable cause under normal rules

p. 373 Failure to File Partnership Return
Not small partnership Reasonable cause - no automatic relief – must show qualifies May be eligible for FTA waiver

p. 373 Failure to File S Corp Return
$195 per SH per month FTF No special relief provision for S corp Must establish reasonable cause May be eligible for FTA waiver Corporate short years Final due: 15th day of 3rd month after dissolved No penalty if filed and paid by original due date Applies to S corp final returns

pp. 373-374 Estimated Tax Penalty: Individual
If estimated payments & withholding insufficient, potential penalty for estimated tax underpayment Individuals liable if Owe at least $1,000 with 2016 return and Prepayment credits < the smaller of 90% of 2016 tax (66% if 2/3 from farming) 100% of 2015 tax (nonfarmers/fisherman) 110% of 2015 if AGI > $150,000 2015 returns must cover 12 months

p. 374 Estimated Tax Penalty: Individual
No estimated tax payments needed if (individual) Had no tax liability for prior tax year Was a US citizen or resident alien prior year Prior tax year covered 12 months Must pay enough tax by due date of each for four payments periods to avoid penalty – Figure 11.1 Estimated tax penalty rate = interest rate 2016: 3% for 1st quarter, 4% for 2nd, 3rd, & 4th

pp. 374-375 Estimated Tax Penalty: Individual
Waiver if: Casualty or other event - inequitable to impose Taxpayer retired (after age 62) or became disabled in either of 2 preceding years and Reasonable cause and No willful neglect Form 2210 – calculate penalty, request penalty reduction, apply excess w/h’g to specific income

p. 375 Estimated Tax Penalty: Individual
IRS will calculate penalty and send notice Timely filed return & penalty paid when due, no interest on penalty Can submit Form 2210 to request reduction Annualized income installment method – complete Sched AI along with Form 2210 Unusual circumstance, retirement, or disability – √ reason on Form 2210 and attach statement

p. 375 Estimated Tax Penalty Comp
Subsequent quarter payment is applied to make up any shortage in prior quarter Withholding divided evenly over 4 quarters May elect to apply against specific income by checking box D in Part II, Form 2210 Excess Soc Sec tax divided evenly Calculated separately for each payment Example 11.1

p. 375 Estimated Tax Penalty: Corporate
Corp., S corp., private foundation or one organized as trust, tax exempt organization Estimated payments if to owe ≥ $500 No penalty payments equal the lesser of: 100% of current year tax or 100% of the prior year liability (prior year tax must be > $0 and cover full 12 months) Example Prior year tax of zero

pp. 375-376 Estimated Tax Penalty: Corporate
Due dates: 15th day of 4th, 6th, 9th, 12th mo. Same penalty rate as for individual Form 2220 to compute, reduce, eliminate Required to file 2220 if uses The adjusted seasonal installment method The annualized income installment method Is a large corporation making 1st installment based on prior year’s tax

Large corporation: Taxable income of ≥ $1M in any of 3 preceding years May use 100% of prior year tax liability (> 0) to determine 1st installment of any tax year Shortage must be added to next installment Example 11.3 2015 tax $400, tax $600,000 1st $100,000, 2nd $200,000, 3rd & 4th $150,000

Waiver of Penalty - Penalty adjusted if: Computed incorrectly Amount/effective date of a payment changes Taxpayer files a superseding return Administrative or legislative waiver applies IRS misapplied a payment/credit & applying penalty “against equity and good conscience” No waiver for reasonable cause

p. 376 Failure to Deposit Penalties (FTD)
Deposit of income tax, EE and ER FICA FTD penalty if deposit not timely, not correct amount, or not made in correct manner Pay w/941 if tax < $2,500 in current or prior qtr. If tax ≥ $2,500 in current & prior quarter or next-day $100,000 deposit obligation, 10% penalty on amounts paid with 941 If tax > $2,500 must use EFT (or 10% penalty) Example Application of $2,500 rule

Deposit Requirements – Figure 11.2 Predetermined deposit schedule based on employment taxes in lookback period Calendar year filer: 12 months ending June 30 New employer: treated as having liability of 0 Deposit Status Information Notice in November Reminder to review lookback period

pp. 377-378 Failure to Deposit Penalties (FTD)
≤ $50,000 taxes in lookback period: monthly Deposit on/before 15th day of following month 15th day Sat., Sun., holiday: next business day > $50,000 taxes in lookback period: semi-weekly Deposit day based on day of payroll – Fig. 11.3 Schedule divides calendar week into two parts Provides at least 3 business days after payroll Sat, Sun, holiday don’t count toward the 3

Safe Harbor Rules Required to deposit 100% by deposit due date No penalty if < 100% deposited if Shortfall does not exceed greater of $100 or 2% of required deposit, and Shortfall is paid/deposited by shortfall makeup date Monthly: by due date of return Semi-weekly: earlier of two dates (p. 378)

If not properly or timely deposited rates are: 2% if 1-5 days late 5% if 6-15 days late 10% if > 15 days late (also those paid w/in 10 days of a first notice) 10% if subject to electronic deposit but not made using EFTPS & 15% for amount unpaid > 10 days after first notice

Waiver of FTD Reasonable cause First-time abatement (FTA) Designate certain payment for certain periods

pp. 378-379 Accuracy-Related Penalty § 6662(d)
Substantial understatement of tax Understatement exceeds the greater of 10% of tax required to be shown on return or $5,000 Rate: 20% of underpayment Penalty Relief Substantial authority, Disclosed relevant facts & reasonable basis, or Acted in good faith & reasonable cause

p. 379 Accuracy-Related Penalty Relief
Disclosure – Forms 8275 or 8275R Reasonable basis – reasonably believed position more likely than not was proper &.. Belief based on facts and law at time filed and Belief relates solely to chances of success on merits of taxpayer’s treatment of issue Experience, education, knowledge of TP Reasonable reliance on professional advice

p. 379 Accuracy-Related Penalty
Reportable transaction Penalty rate of 20% if disclosed Penalty rate of 30% if not disclosed Listed transactions and reportable transactions if significant purpose is avoidance or evasion Form 8886 to disclose facts affecting treatment Reasonable basis defense does not apply

p. 379 Civil Fraud Penalty - § 6663(a)
75% of understatement due to fraud Requires intent to evade IRS must show that the taxpayer: Knew content of the return was false, and Filed the return with intent to evade tax No reasonable cause relief Fraud of one spouse not imputed to other

p. 380 Erroneous Refund/Credit Claim - § 6676
Imposed for an erroneous claim for refund or credit that is Excessive in amount and For which there is no reasonable basis Applies to both formal & informal claims 20% of the excessive amount claimed Excessive amount = disallowed amount Reasonable basis applies (but not cause)

pp. 380-381 Information Reporting Penalties
Failure to file (§ 6721) or furnish (§ 6722) information returns File: not timely, incorrect media, incorrect format, missing/incorrect name or TIN Furnish: not timely, incorrect payee, missing information, incorrect information Filing requirements – Figure 11.4

p. 381 Information Reporting Penalties
≥ 250 same type info returns - electronic If done by paper, penalty on # in excess 300 Forms DIV on paper, penalty on 50 Waiver from electronic filing File Form 8508 and show undue economic hardship to file on electronic media File at least 45 days before due date

Extension of time to file File Form 8809 – automatic 30 day extension Postmarked no later than due date Request online by due date Up to additional 30 days – second Form 8809 Request before end of first extension Note: W-2’s can have only one extension

p. 382 Information Reporting Penalties
Based on how late filed, how late corrected Increased for those due on or after 1/1/16 $50 per failure – max $529,500 - w/in 30 days $100 per failure – max $1,589,500 – by 8/1 $260 per failure – max $3,178,500 – after 8/1 Lower max for small businesses Future amounts indexed for inflation

No fist-time abatement (FTA) relief Reasonable Cause Written statement, penalties of perjury, all facts to establish reasonable cause Address any issue in prior 5 years (see Note) Acted in responsible manner Significant mitigating factors Events beyond taxpayer’s control

p. 383 Other Information Reporting
Failure to Electronically File Form 1065 > 100 PNs, required to file electronically File paper: $260 per PN in excess of 100 Does not apply if: Waiver obtained Reasonable cause, not willful neglect Reasonable effort to comply, mitigating factors beyond control, steps to prevent

p. 383 Other Information Reporting
Affordable Care Act (Chapter 5) Form 1095-C employer health coverage reporting form subject to reporting penalties Form 1095-B employer health coverage (self-insurance) and insurance company reporting forms subject to reporting penalties

p. 384 Reasonable Cause Facts and circumstances determination
Ordinary business care & prudence Event outside TP’s control or undue hardship Extent of TP’s effort to report properly Continued failures indicate willful neglect IRS will look at 3 year compliance history

p. 384 Reasonable Cause IRS considers:
The length of time between the event cited as a reason for noncompliance and subsequent compliance When the act was required by law Period during which TP unable to comply When the TP complied Whether TP could have anticipated the event

p. 385 Ordinary Business Care & Prudence
Made reasonable efforts to conserve $ to satisfy liability but was unable to pay Regulations examples Has: able to pay but needed $ for medical expenses – hardship to pay taxes Lacks: lavish/extravagant living expenses with no reserve for anticipated taxes

p. 385 Events Outside of Taxpayer’s Control
Death, illness, or absence Relationship to taxpayer Date of death, duration & severity of illness Dates and reasons for absence How did an event prevent compliance Were other business obligations impaired How soon after event were tax duties addressed

pp. 385-386 Fire, Casualty, or Disaster
Ordinary business care & prudence - things beyond TP’s control prevented compliance Timing of the event Effect on the taxpayer’s business Steps taken to attempt to comply If the TP complied when it became possible

p. 386 No Records Ordinary business care & prudence - things beyond TP’s control prevented compliance Explanation needed: Why records unavailable What was done to secure needed information Did TP contact IRS for ideas of what to do Once info received did TP promptly comply Letters/doc showing TP’s effort to obtain

p. 386 Mistake, Reliance, Ignorance, Forgetfulness
Mistake – when and how it was discovered, what was done to correct it, were actions timely Reliance – if due to lack of access or ignorance of the law, reasonable cause may apply Taxpayer’s education Had TP previously been subject to the tax Had TP been penalized before Recent form or law changes Level of complexity involved

p. 386 Mistake, Reliance, Ignorance, Forgetfulness
Mistake – when and how it was discovered, what was done to correct it, were actions timely Reliance – due to lack of access or ignorance of the law, good faith effort to comply Taxpayer’s education Had TP previously been subject to the tax Had TP been penalized before Recent form or law changes Level of complexity involved

pp. 386-387 Undue Hardship More than just an inconvenience
When did TP know payment could not be made? Why was TP unable to pay? Did the TP explore other means to secure $? Did TP supply supporting documents? Did the TP pay when funds became available?

p. 387 Penalty Abatement Request
Explain what happened and when and answer: What prevented the TP from complying? How did facts & circumstances result in TP not complying? How did TP handle the remainder of affairs? Once situation changed, what attempt did the TP make to comply? Request as early as possible in collection cycle Denials may be appealed

p. 387 Reasonable Cause Assistant (RCA)
IRS personnel required to use Computer program to ensure consistent and equitable administration of penalty relief Data from request entered and immediate determination provided Approval or denial letter issued Transcript shows RCA used if PRC 020 present

pp. 387-388 Statutory Exceptions
Figure 11.5 Erroneous Advice Written, not oral, but oral may be considered Must have provided adequate accurate info Penalty relief is not tax relief Application of Late Deposits Deposit to most recent period unless designate Can designate, w/in 90 days of FTD notice

pp. 388-389 Administrative Waivers
Automatic relief in designated circumstances First-Time Abatement FTF, FTP, FTD penalties – granted only once No penalty in prior 3 yrs. (except estimate tax) Current on taxes – filed and paid (installment) Applies to earliest period Not available for event-based filings (e.g. 706)

pp. 389-390 Administrative Waivers
Deposit Frequency Changes IRS allowed to waive FTD penalty for first deposit due after change in frequency of FTDs Employer net worth must be < $7,000,000 Employer cannot have > 500 employees Correction of IRS Error Penalty automatically reversed when corrected Figure Table of Penalties & Relief

pp. 390-391 Penalty Appeals Appeals Office penalty consideration
Recommend abatement or nonassertion based on all the standard reasons Consider hazards of litigation Penalty consideration by Appeals As part of audit deficiency Appeal of penalty abatement request denial Appeal in writing with detailed explanation

p. 391 International Penalties
Foreign Bank Account Report (FBAR) Civil: nonwillful w/o reasonable cause $10,000 Civil: willful $100,000 or 50% account balance Penalties determined per account Penalty can apply to > 1 person for 1 account Criminal: intentionally filing false FBAR or willful failure – up to $500,000 and/or 10 years IRS carries burden of proof

p. 392 International Penalties
FBAR Penalty Relief Granted only if clearly determined that there was no intent to evade filing the FBAR Reasonable cause relief applied IRS Voluntary Compliance Program Relief Penalties may be reduced or eliminated Figure 11.7

p. 393 FBAR Reasonable Cause
Facts & circumstances determination Reason for not filing Compliance history re: tax obligations Time between failure and compliance Ignorance of the law if good-faith effort made Whether taxpayer aware of specific obligation Considers education level, professional background, if penalized before, level of complexity, recent law changes, intentional concealment of assets

p. 393 Other International Penalties
Failure to File Form 8938 (§ 6038D) Reports interests in foreign financial assets $10,000 per return + $10,000/month beg’g 90 days after notification - $500,000 max/return Failure to File Form 3520 (or if incomplete) Transactions w/foreign trusts, gifts from foreign Greater: $10,000 or 35% of reportable amount but if gift, 5% of gift per month to 25% max

pp. 393-394 Other International Penalties
Failure to File Form 3520-A [§ 6048(b)] Foreign trust with a US owner Failure to file or filing incomplete return: Greater of $10,000 or 5% of gross value of trust assets owned by US person Failure to File Form 5471 US persons w/respect to certain foreign corp $10,000 per return + $10,000/month beg’g 90 days after notification - $500,000 max/return

Failure to File Form 5472 25% foreign-owned US corp or foreign corp engaged in US trade or business $10,000 per return + $10,000/month beg’g 90 days after notification - $500,000 max/return Failure to File Form 926 US transferor of prop to a foreign corp 10% value of property to $100,000/return No max if failure intentional

Failure to File Form 8865 US persons w/respect to certain foreign PSs $10,000 per return + $10,000/month beg’g 90 days after notification - $500,000 max/return 10% of value of any transferred property not reported subject to $100,000 limit

Preparer Penalties p. 395 Disclosure and Use of Tax Return Info
§ 7216 – misdemeanor criminal penalty Knowingly or recklessly disclose or use tax return information without TP’s consent $1,000 fine + up to one year in prison/violation § 6713 – civil penalty Disclose or use tax return information without the TP’s consent even if inadvertent $250/violation – up to $10,000 max/year

Preparer Penalties p. 395 Disclosure and Use of Tax Return Info
Tax return information All information collected to prepare return, whether from TP or not, even if not used Unauthorized disclosure Whenever tax return information made known to anyone in any manner not authorized Unauthorized use Reference to or reliance on tax return information for unauthorized actions

Preparer Penalties pp. 395-396 Unreasonable Position § 6694
Prepares a return or claim for refund reflecting understatement of liability due to an unreasonable position Preparer knew or reasonably should have known of the position Position unreasonable unless Substantial authority or Properly disclosed w/reasonable basis

Preparer Penalties p. 396 Unreasonable Position § 6694
Penalty: Greater of $1,000 or income derived from prep of the return Penalty Relief: Reasonable cause & acted in good faith Relied on advice of another not in firm & Reason to believe competent Advice written or oral Burden on preparer to establish

Not good faith if Advice unreasonable on its face Preparer knew or should have known Adviser did not know all facts Advice outdated – law changes since advice rendered

IRS considers Issue complex, uncommon, highly technical such that competent preparer could make error Understatement due to 1 error, not many Whether understatement was material in relation to correct tax With preparer’s normal office practice & preparer’s knowledge, error in question would rarely occur

Preparer Penalties pp. 396-397 Willful or Reckless Understatement
Understatement due to willful attempt or reckless or intentional disregard of rules/regulations Reckless: highly unreasonable misrepresentation or omission w/extreme lack of ordinary care Greater of $5,000 or 50% of income derived Example 11.5 Clearly marked domestic help deducted as wages Example 11.6 Disregarded check register & overstated expenses

Preparer Penalties p. 397 I.R.C. § 6695
$50 per failure – $25,500 max – return or claim (a),(b),(c) max/cal. yr, (d),(e) max/return period N/A if reasonable cause & not willful neglect (a) Failure to furnish copy to taxpayer (b) Failure to sign return (electronic/manual) (c) Failure to furnish TIN (preparer’s or firm’s) (d) Failure to retain copy of list (e) Failure to file correct information returns

Preparer Penalties p. 397 I.R.C. § 6695
(e) Failure to file correct information returns of tax return preparers under § 6060 + failure to include a required item (f) Negotiation of check $510 per check, no max, no reasonable cause

Questions?

Penalties and Defenses Chapter 11 pp

Similar presentations

Presentation on theme: "Penalties and Defenses Chapter 11 pp"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Penalties and Defenses Chapter 11 pp

Similar presentations

Presentation on theme: "Penalties and Defenses Chapter 11 pp"— Presentation transcript:

Similar presentations

About project

Feedback