Tag Archive for tax liability

Tips To Avoid Tax Penalties For 2017

With the arrival of the holidays, we are thinking about family get-together’s, holiday gifting and parties. But right behind the good times is tax season. Before you get busy with holiday festivities, take the time to consider a couple of things you can do now to avoid or reduce potential penalties on your 2017 tax return.

Underpayment Penalty

If you are a wage earner, you may not have had enough income tax withheld from your paycheck to meet your tax liability for the year. Or, if you have wages and also have taxable income from other sources such as investments, a second job or a side business, or if you are married and your spouse is also employed, your withholding for the year may not be enough to cover your 2017 tax liability. Read more

Sales Tax Exposure Revisited

Monika Miles

In our practice, we see many new clients who have sales tax exposure issues. And we, of course, are happy to help them identify and then mitigate that exposure. As we discussed in our blog last month, “Sales Tax Non-Compliance: What’s Your Exposure“, sales tax exposure can add up quickly. Sales tax is a gross tax and if not properly collected from the buyers at the time of the sale, it can come back to haunt the seller later.

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Pay your Taxes at 7-Eleven

John Stancil

Partly in response to the problem faced by dealers in medical marijuana or those in states where marijuana sales are legal, the IRS has partnered with PayNearMe to allow taxpayers to make cash payment on their taxes at participating 7-Eleven stores in 34 states. This allows anyone without a bank account a more Read more

Will Your Favorite Tax Benefit Expire?

More than 50 tax provisions that Congress routinely extends on a yearly basis expired at the end of 2014. The big problem is each year they are extending the provisions later and later in the year creating uncertainty for taxpayers on whether they can depend on these tax incentives or not. This makes tax planning unclear and leaves taxpayers wondering about their projected tax liability.

For 2014, Congress waited almost to the end of the year to apply many of the provisions to the 2014 tax year. This was not only a problem for taxpayers but also for the IRS, which needed to adjust its forms and tax filing software at the last minute and actually had to delay the start of the tax season. Read more

Standard vs. Itemized Deductions

In preparing your tax returns, you are allowed the choice of either claiming the standard deduction, or claiming itemized deductions. Your deductions (standard or itemized) are subtracted from your adjusted gross income (AGI) to figure your taxable income. Depending on which choice gives you the greater benefit, you may choose to take your standard deduction, or you may choose to claim itemized deductions; the aim here is to maximize your refund or minimize your tax liability.

The Standard Deduction

The standard deduction is a fixed dollar amount that the government allows taxpayers who do not itemize deductions to deduct from their income. The standard deduction reduces the amount of income that is taxed, and eliminates the need for many taxpayers Read more

Mid-Year Tax Planning Checklist

All too often, taxpayers wait until after the close of the tax year to worry about their taxes, missing opportunities that could reduce their tax liability or help them financially. Fall is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and thus avoid unpleasant surprises after it is too late to address them.

• Did you get married, divorced, or become widowed?
• Did you change jobs or has your spouse started working?
• Did you have a substantial increase or decrease in income?
• Did you have a substantial gain from the sale of stocks or bonds?
• Did you buy or sell rental property? Read more

Important Date For Taxpayers Living Abroad

If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15, 2015 is the filing due date for your 2014 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15, 2015. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below).

Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. Read more

Man Convicted of Threatening To Assault And Kill IRS Agent And Torture The Agent’s Family Over Audit Proceedings

While death and taxes are always certain, take lesson from Andrew A. Calcione that you should never mix them together.

In May 2014, a federal judge found 49-year-old Andrew A. Calcione of Cranston, Rhode Island, guilty of threatening to assault an IRS Revenue Agent, rape and kill the agent’s wife and injure the agent’s daughter while the agent watched before murdering the agent. The reason? Mr. Calcione didn’t want to pay his tax bill of $330,000.

According to government testimony as reported in United States of America v. Andrew A. Calcione, U.S. District Court for the District of Rhode Island (Providence County), Case No. 1:13-mj-00291-LDA, Mr. Calcione was selected for audit for the years 2008, 2009 Read more

The Complexities of Calculating The Accuracy-Related Penalty – Part III

This blog offers insight into some of the complexities of calculating the accuracy-related penalty.  It will be shared as Parts I, II and III.

Impact of NOL Carrybacks or Carryovers

Calculating penalties is more complicated with NOL carrybacks and carryovers. As stated above, an accuracy-related penalty may apply if a taxpayer underpays its tax liability for the year. Thus, if a taxpayer has a loss in a year and, after the IRS proposes adjustments reducing the amount of the loss, the taxpayer remains in a loss position, an accuracy-related penalty will not be assessed. However, if that loss was carried back or over to another year to reduce the taxable income in that year, then an understatement of tax and accuracy-related penalty may result because the IRS adjustments to the loss year reduced the NOL amount.

The substantial-understatement penalty applies to any portion of an underpayment for a year to which a loss, deduction, or credit is carried that is attributable to a “tainted item” for the year in which the carryback or carryover of the loss, deduction, or credit arises (the “loss or credit year”) (Regs. Sec. 1.6662-4(c)(1)). Thus, whether an understatement is substantial for a carryback or carryover year is determined with respect to the tax return for the carryback or carryover year. Tainted items are taken into account with items arising in a carryback or carryover year to determine whether the understatement is substantial for that year (Regs. Sec. 1.6662-4(c)(1)).

Except in the case of a “tax shelter item” (see Regs. Sec. 1.6662-4(g)) a “tainted item” is any item arising in the loss or credit year for which there is neither substantial authority nor adequate disclosure (Regs. Sec. 1.6662-4(c)(3)(i)). A tax shelter item is “tainted” if, with respect to the loss or credit year, it lacks both substantial authority and a reasonable belief that its tax treatment is more likely than not proper (Regs. Sec. 1.6662-4(c)(3)(ii)).

Although a loss, deduction, or credit that is carried back or carried over to another tax year could result in the imposition of a substantial-understatement penalty in the carryback or carryover year, a taxpayer cannot reduce a substantial understatement for a carryback year by an allowable carryback of a loss, deduction, or credit to that year (Regs. Sec. 1.6662-4(c)(2)). A similar rule applies for the valuation misstatement penalty.

The penalty for a substantial or gross valuation misstatement applies to any portion of an underpayment for a year to which a loss, deduction, or credit is carried that is attributable to a substantial or gross valuation misstatement for the year in which the carryback or carryover of the loss, deduction, or credit arises (see Regs. Sec. 1.6662-5(c)(1)).

Example 3. Adjustments do not overcome NOL; no carryback/over: ABC Corp. reported a current-year loss of $4.5 million on its year 1 original income tax return. ABC excluded from its year 1 income a $2.5 million payment it received as a return of capital. An IRS examination determined that the $2.5 million payment was actually a dividend and was includible in ABC’s year 1 taxable income. After adjustment, ABC’s taxable income is shown in Exhibit 6.

It is determined that there was no substantial authority to exclude the $2.5 million payment from ABC’s year 1 income. Moreover, ABC did not attach a Form 8275 to its year 1 tax return to disclose the position, and ABC does not meet the reasonable-cause and good-faith exception of Sec. 6664.

Although the adjustment to ABC’s year 1 taxable income reduces its NOL, the adjustment does not result in ABC’s incurring taxable income for year 1. Because the accuracy-related penalty is based on an understatement of tax and ABC does not owe any tax for year 1, it is not subject to an accuracy-related penalty for the year. However, if this loss is carried over or back to another year, an accuracy-related penalty may apply in the carryback or carryover year.

Example 4. Adjustments do not overcome NOL; loss carried over to another year: In year 2, ABC reported income on its originally filed return but used the NOL from year 1 to offset the income (see Exhibit 7).

ABC’s underpayment of income tax for year 2 attributable to the year 1 NOL adjustment is calculated as shown in Exhibit 8.

As discussed above, the substantial-understatement penalty can apply to a carryover year as a result of “tainted items” from a loss year. The tainted items are taken into account with items arising in the carryback or carryover year to determine whether the understatement is substantial for that year. The adjustment to the year 1 NOL is considered a tainted item because there was neither substantial authority for the position nor adequate disclosure.

ABC’s understatement of its year 2 tax liability is substantial, since it exceeds 10% of the tax required to be shown on the return for the tax year and exceeds $10,000. As a result, ABC is subject to a penalty of $175,000 ($875,000 × 20%).


At first glance, the formula for calculating the substantial-understatement penalty seems straightforward and easy, but numerous factors may cause complications. Because applicable defenses, coordination with other penalties, and carryback and carryover implications may increase the complexity, practitioners must exercise care in computing and verifying penalty amounts.


by John Keenan, J.D., Washington, D.C., and Whitney Lessman, J.D., Chicago. Rona Hummel, CPA, an adjunct professor with the College of Business at Bloomsburg University in Bloomsburg, Pa., contributed to this item.  “Tax Clinic” The Tax Adviser, March 01, 2013 – Original Blog Editor: John Almeras, Tax Manager, Delloitte Tax LLP in Washington D.C.

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)