Topical Index to Chapter 11 Penalties and Interest

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1 Topical Index to Chapter 11 Penalties and Interest Accuracy-related penalty 6662 Penalties grouped Negligence Substantial understatement of income tax Substantial valuation misstatement Substantial overstatement of pension liabilities Substantial estate or gift tax valuation 20% penalty generally Role of disclosure Increased accuracy penalty 40% Negligence defined Disregarding rules and regulations Penalty Notices Civil Fraud Penalty 6663(a) 75% penalty Burden of proof on IRS Evidence of fraud Collateral estoppel Civil fraud on joint tax returns Innocent Spouse Defense to Penalties 6015 Grounds for relief Form 8857 required to be filed Limitations period two years Equitable innocent spouse election Rev. Proc , C.B. 447 Tax Court review permitted

2 11.04 Substantial Understatement of Tax 6662(b)(2) 20% penalty Substantial authority exception Substantial authority defined Adequate disclosure Substantial Valuation Misstatements 20% penalty 40% penalty Reasonable cause waiver possible Substantial Estate or Gift Tax Valuation Understatement 6662(b)(5) 20% penalty Reasonable cause waiver possible P enalty for gross valuations misstatements attributable to incorrect appraisals Failure To File Returns 6651(a)(1) 5% monthly 25% maximum Minimum penalty for income tax returns Does not apply to information returns or estimated tax returns Waivable by reasonable cause Extensions of time to file Fraudulent failure to file penalty increase to 15% monthly maximum 75% Failure To Pay Tax 6651(a)(2).5% per month maximum 25% Circumstances where penalty increased to 1% per month Coordination of late filing and late payment penalty Can be abated for reasonable cause Estimated Tax Penalty Taxpayers subject to the penalty Dates estimated tax due 6654 penalty

3 Form 1040-ES Rule of thumb for safe harbors Not subject to waiver due to reasonable cause Special rule for withholding Rate of estimated tax penalty 6655 corporate estimated tax payments Failure To Timely Deposit 6656 method of making deposits Types of taxes requiring deposits Deposit requirements 6302(c) Regulations Amount of deposit penalty 2%/5%/10% Increase to 15% penalty Cascading penalty problems IRS Notice 98-14, C.B. 585 Right to designate deposits Criminal penalty Trust Fund Recovery Penalty Not true penalty 6672 Method of assessment Responsibility Willfulness Type of investigation Criminal tax charges possible Form 4180 Extension of assessment period Form 2750 Possible conflict of interest Right of Appeals Hearing Elements of Protest Right of contribution 3505 other persons or entities liable Defense of Reasonable Cause Code Sections to which reasonable cause applies Manual consideration of reasonable cause defense Additional factors to consider

4 Natural calamities Reliance as reasonable cause Ignorance of law or mistakes of fact Financial difficulties as basis for waiver Final regulations limiting defenses to accuracy-related penalty in certain cases Penalty Appeal Procedure Post assessment appeal Letter or Form 843 Form Letter 854C denial Appeals Branch review Post-payment refund procedure as alternative Third Party Penalties Tax preparers Signing, copying returns Aiding and abetting Criminal sanctions Tax shelter penalties Interest Rates applied Suspension of interest Interest during installment periods Penalties accrue interest Computer programs to verify Abatement of Interest 6404(e) IRS discretion Managerial Acts Ministerial Acts Procedure for claiming abatement Filing Form 843

5 U.S. Tax Court review Miscellaneous Detailed interest calculation 6631 Global netting of interest 6621(d) Suspension for failure to contact Interest on refunds 11 Penalties and Interest ACCURACY-RELATED PENALTY NEGLIGENCE PENALTY The Internal Revenue Code has been chock full of penalties for taxpayer action or inaction, as the case may be. Practitioners will often be confronted with client anger and frustration in sorting out penalties that to them seem to cascade from a single event. This chapter reviews those penalties the client and practitioner are likely to encounter. The Code provides for many others in specific situations. Often criticized for stacking, the Code has been revamped and a substantial number of penalties have been grouped into Section 6662 under the category of accuracy-related penalties. Client misdeeds are often assessed a catch-all civil penalty for accuracy. The accuracy penalty includes negligence, substantial understatement of in-come tax, substantial valuation misstatement, substantial overstatement of pension liabilities, and substantial estate or gift tax valuation. The penalty itself is 20% of the tax liability, attributable to one or more of the accuracy-related violations. The penalty will only apply to that portion which is attributable to the violation and not, as had been the case under prior law, to the entire underpayment. Former separate penalty provisions Sections 6653(a), 6659, 6659A, 6660, and 6661 have been repealed. The negligence portion of the accuracy penalty includes any failure to make a reasonable attempt to comply with the provisions of the law, as well as the intentional disregard of rules or regulations. This penalty is imposed in addition to the delinquency penalty under Section 6651(a). The practitioner may