Some civil penalties, such as the delinquency penalties, are fairly automaticall
ID: 2547544 • Letter: S
Question
Some civil penalties, such as the delinquency penalties, are fairly automatically applied, while others, such as the accuracy related penalty for negligence, involve value judgments which can usually be negotiated.
Take, for example, Architect Andy, who was reimbursed by clients for expenses he had paid for in advance. Andy's bookkeeper omits from gross income those reimbursements, but deducts those same expenses on Andy's business expenses schedule. Is this something small that could happen to anyone, or the result of a lack of such care as an ordinary prudent person would exercise in her or his business affairs?
Who gets to decide what an "ordinary prudent person" would do anyway?
Focus on whether discretionary penalties should exist, how should the standards be determined, and when is an error enough that a discretionary penalty should be imposed.
Explanation / Answer
The Code imposes a variety of deadlines upon taxpayers for filing tax returns and paying tax.
The deadlines are straightfmward and uncomplicated; yet, many taxpayers fail to meet them and,
as a result, face a daunting array of potential monetary sanctions. Monetary sanctions include
penalties for:
(1) late or non-filing;
(2) late or non-payment of taxes;
(3) not prepaying an adequate amount of tax liability; and
(4) certain accuracy related issues.
Overview:
• The late filing penalty (section 665l(a)(l)) is imposed when a taxpayer has not filed a tax
return by its original due date or its validly extended due date. The late filing penalty
applies to late filing and non-filing. For most Form 1040s, a return filed after Aprill5 (or
October 15, assuming a valid extension was requested) is subject to the penalty.
Generally, the penalty is at the rate of five percent per month (maximum of 25%) of the
tax due.
• There are two late payment penalties: section 665l(a)(2) and section 665l(a)(3). The late
payment penalty under section 665l(a)(2) arises when a taxpayer fails to pay the tax
shown on the return by the payment due date. 3 The late payment penalty under section
665l(a)(3) arises when a taxpayer fails to pay an assessed deficiency (generally after the
Service audits the taxpayer resulting in additional tax liability) within a short period of
time after notice and demand is made. The rate for both penalties is one-half of one
percent per month of the amount shown as tax due (maximum of25%).4
• Section 6654 requires that taxpayers prepay 90% of their tax liability through
withholding, making voluntary installment payments during the year, or by applying a
prior year's tax refund to the current year. If the 90% requirement is not met, the
estimated tax penalty automatically applies unless the taxpayer can establish that he
qualifies for one of the mathematical safe harbors. The most commonly used defense to
the estimated tax penalty is that the amount paid during the subject year was equal to or
greater than the tax liability for the previous year.
Sections 6072 and 6151 establish the due dates for filing income tax returns and paying the tax
due. For individuals and partnerships, the due date is April 15 (or day 15 of the fourth month
following the end of the taxpayer's taxable year). For corporations, the due date is day 15 of the
third month following the end of the taxable year. If the due date falls on a weekend or holiday,
the due date is extended until the next business day for filing purposes. 5 For example, the statute
of limitations for the Service to assess additional tax for a 2011 Form 1040 filed on April 16,
2012, is April 15, 2012, even though April 15, 2012 was a Sunday and the return was not due
until Aprill6. 6
Returns are generally deemed filed when received rather than when mailed. The one exception to
this rule is when the "timely mailed, timely filed" rule of section 7502 applies. When the "timely
mailed, timely filed" exception applies, the mailing date is the filing date for SOL purposes.
Thus, if a return was postmarked April 15, 20012, and received by the Service on April 17,
20012, the postmarked date of April15 is deemed the filing date.
The taxpayer may seek an extension if he cmmot file his return on time. Extensions are taken into
account in determining whether the return filing is timely. For individual taxpayers, an extension
of time to file until October 15 is automatic. All the taxpayer must do is file Form 4868 on or
before the original due date of the return and properly estimate his tax liability. A taxpayer
should file an extension request properly estimating tax liability and, if funds are not available
when the return is eventually filed, attach a Form 9465 requesting an installment payment plan or
file an Offer in Compromise (OIC) on Form 656. When requesting an extension of time to file, a
taxpayer should try to pay as much of the tax as possible in order to reduce the accrual of interest
and late payment or estimated tax penalties.
If you have negotiated with your client that you can invoice them for expenses, with inniAccounts you simply mark expenses as billable then within seconds add them to an invoice.
Once an expense or mileage claim is identified as billable, when you create an invoice you simply select the expense from a list to add it. Care needs to be taken however to make sure that you charge your customers the correct amount of VAT.
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