Lori, a calendar year individual taxpayer, files her 2018 return on February 10, 2020. She had obtained a six-month extension for filing her return. There was additional income tax of $30,000 due with the return.
a.What are Lori’s penalties for failure to file and to pay? b.Would your answer to a. change if Lori, before the due date of the return, had retained a CPA to prepare the return and it was the CPA’s negligence that caused the delay?
What will be an ideal response?
?
| a. The penalties cannot overlap. They apply to every month or portion of month of late filing. | |||
| Failure to pay penalty (1/2% × $30,000) × 10 months | $1,500 | ||
| Plus: Failure to file penalty (5% × $30,000) × 4 months ? | $6,000 | ||
| Less: Failure to pay penalty for same period ? | (600) 5,400 | ||
| Total penalties | $6,900 | ||
| The failure to file penalty cannot exceed a total of 25%. Consequently, this penalty ceases to increase after 5 months (i.e., 5% × 5 months = 25%).?The failure to pay penalty also is limited to 25%. At the rate of 1/2 of 1% per month, such penalty can continue to run for as long as 50 months. | |||
| b. No. A taxpayer's reliance on a CPA generally does not constitute reasonable cause to avoid the failure to file and pay penalties. The CPA may incur preparer penalties as well. | |||
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