Lance prepares tax returns for his clients. He prepared his brother’s income tax return for $1,000...

Lance prepares tax returns for his clients. He prepared his brother’s income tax return for $1,000 and he willfully neglects to include $30,000 of income since his brother did not receive a Form 1099 for his consulting work. Lance is aware that his brother earned the $30,000 but fails to report it since he does not believe the IRS will catch the understatement of income. The additional tax on this $30,000 of income would have been $7,500. What is the amount of the penalty that may be imposed on Lance for the understatement of income? Lance charged his brother $3,750 to prepare the return. Answer is $5,000, but I would like to see the steps.

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Expert Solution

Hi,

Reference made to : U.S. CODE: TITLE: 26; SUBTITLE: F; CHAPTER: 68; SUB CHAPTER: B; PART: I ;§ 6694

(b) UNDERSTATEMENT DUE TO WILFUL OR RECKLESS CONDUCT

(1) IN GENERAL Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of -

(A) $ 5,000/-

(B) 75% of the income derived (or to be derived) by the tax return preparer with respect to the return or claim

Now, in the question stated above, Mr. Lance has charged $ 3,750 for preparing and filing the return. 75% of $3,750/- works out to $ 2,812.50. Since $ 5,000/-, as provided in the statute above is greater than $ 2,812.50, the amount of penalty that may be imposed on Mr. Lance for understatement is $ 5,000/-.

Hope you understand !

Have a nice day ahead

ekkarill92 answered 10 months ago

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