Question

Self-Study Problem 12.3

Part a:

Linda filed her tax return 2 months late. The tax paid with the return amounts to $3,000. What is Linda's total penalty for failure to file and failure to pay, assuming the failure to file is not fraudulent?
$__________

Part b:

Kim underpaid her taxes by $10,000 due to negligence. What is Kim's penalty for negligence?
$_________

Part c:

Using the same information as in Part b, what is the amount of the penalty if the underpayment was determined to be due to civil fraud?
$_________

Answer 1

Part a.

Linda Filed her tax return 2 month late and assuming so fraud is done by her so Penalties she have to pay are '

Penalty for failure to file = 4.5% for every month or (part of Month) = 4.5 % X $3000 X 2 month = $270

Penalty for Failure to Pay = 0.5% for every month = 0.5 % X $3000 X 2 Month = $30

Total Penalty = $270 + $30 = $300

As both penalty applies, Penalty for failure to file reduced by Penalty for Failure to Pay which means 5 % reduced by 0.5% = 4.5 % Per Month.

Part b

If Tax is Underpaid due to negligence the penalty is 20% of underpaid taxes

Kim underpaid her taxes by $10,000 due to negligence.

Penalty = 20% X $10,000 = $2,000

Part C

if the underpayment was determined to be due to civil fraud penalty implies 75% of underpaid taxes.

Hence, Penalty = 75% of $10,000 = $7,500