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Revenue understatements commonly arise from fraudulent behavior by management or against the company, such as from employee theft or by outsiders who control and have an incentive to underreport the transactions or activities that generate revenues based on contractual arrangements.
A recent law change added some exceptions to the Large Corporate Understatement Penalty (LCUP) that may apply to your clients.
6015(b) is available to electing joint filers when there is a tax understatement attributable to erroneous items of the other party if the electing individual establishes that he or she did not know of the understatement and had no reason to know of the understatement.
In response, the Treasury and IRS developed regulations under section 6011 requiring extensive disclosures of reportable transactions that might be indicative of tax shelter transactions; Congress, for its part, enacted sections 6662A and 6707A, which penalize taxpayers for tax understatements attributable to reportable transactions and for failing to disclose reportable transactions, respectively.
With respect to understatements of tax resulting from disallowed deductions, the Tax Court held that the knowledge standard under [section] 6015(c) requires the Service to prove that the taxpayer had actual knowledge of the factual circumstances which made the item unallowable as a deduction.
Further, a taxpayer could use the defense only for understatements of deductions or credits that exceeded a specified percentage of the innocent spouse's adjusted gross income.
Tax preparer penalties--the focus of this article--have been stiffened and the preparer's scope of liability has been broadened, particularly for understatement due to unrealistic positions and willful or reckless conduct.
The negligence penalty also applies to any understatement caused by a careless, reckless, or intentional disregard of a specific provision of the IRC, Treasury Regulations, a revenue ruling, or an IRS notice.
A substantial estate or gift tax valuation understatement (Sec.
Sections 402, 403, 404, 405, 416, and 417 of the Senate bill would provide a variety of penalties in respect of abusive tax shelters, including imposition of a 30-percent penalty for non-disclosure of a reportable transaction, a 20-percent penalty for understatements related to a reportable transaction, and a 40-percent penalty for a "noneconomic substance transaction understatement"; limitations on waivers of various penalties; and an extension of the statute of limitations.
However, before 1998, this relief was somewhat limited and involved meeting both dollar understatement thresholds and a standard based on understatements that were "grossly erroneous"