In: Accounting
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.
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