Episode 28: In this episode, Timalyn discusses the IRC 662 Accuracy-Related Penalty. She'll explain what it is, how it can be issued against you and how to avoid it. She'll use the example of a live case involving Beyoncé Knowles-Carter.
Timalyn begins by explaining how a case is in the US Tax Court, part of the Taxpayer Privacy Act no longer applies. This is why she's able to find public information about the case involving Beyoncé.
What is the Accuracy-Related Penalty?
This penalty applies if you underpay the tax required to be shown on your return. Individuals have 2 common accuracy-related penalties.
The first is negligence or disregard of the rules or regulations. The second is a substantial understatement of income tax.
Timalyn explains that negligence is when someone doesn't make a reasonable attempt to follow the tax laws, when preparing a tax return. Disregard means someone carelessly, recklessly or intentionally ignore the tax rules or regulations.
Examples of Negligence
Not keeping records to prove you qualify for specific credits and/or deductions is a simple example. For instance, if you are claiming a child on your return, you need to be able to prove the child exists and that you have the right to claim him/her.
Another example would be not claiming income shown in an information return, such as on a W-2 or 1099.
Finally, not checking the accuracy of a deduction or credit; especially when it seems too good to be true.
Examples of a Substantial Understatement of Income Tax
An individual can be hit with this penalty if he/she understates the tax liability by 10% of the tax required to be shown on the tax return or $5,000 (whichever is greater).
A business owner might claim a deduction based on Section 199a Qualified Business Income Deduction. The penalty would apply if income is understated by 5% of the tax required to be shown or $5,000 (whichever is greater).
How to Avoid the Accuracy-Related Penalty
· Don't claim a credit or deduction for which you don't actually qualify.
· Claim all required income when completing your tax return.
Timalyn reminds you that the IRS may be slow, but they're not stupid. They will eventually find out and assess various penalties. In previous episodes, Timalyn has discussed the Failure to File Penalty (which can be up to 25%). If you are facing an Accuracy-Related Penalty, it can be up to 20% of the portion of the underpayment due to negligence or disregard. It's also 20%, when a substantial understatement is made. This means a penalty of 20% of the amount you understated. You'll also be assessed the interest related to these issues.
Can I Get the Accuracy-Related Penalty Removed or Reduced?
Timalyn explains that it might be possible, but listen to her episode on First-Time Penalty Abatement.
You have the burden of proof as to why the penalty should be removed or reduced. You'll have to show that you acted in good faith and can show a reasonable cause as to why it happened. Timalyn explained Removing Penalties for Reasonable Cause, in Episode 12.
If you want to book a consultation to discuss your specific situation, you can schedule an appointment at https://bookingbowens.as.me/schedule.php. This is on the website for Bowens Tax Solutions.
Avoiding the Penalty by Substantiating
As Timalyn stated earlier, it may be possible to avoid the Accuracy-Related Penalty, but you have to be able to prove why it shouldn't apply. You need to report everything required, and to be able to explain why something as omitted from the return, or isn't actually required.
Beyoncé Knowles-Carter vs. US Tax Court
According to public information, for the tax year 2018, her tax return showed a deficiency of $805,850. Per the Internal Revenue Code Section 662a, she was accessed an accuracy-related penalty of $161,170.
In 2019, another deficiency of almost $1.5 million. Per the Internal Revenue Code Section 662a, she was accessed an accuracy-related penalty of $288,549.
Now, as Timalyn explained in Episode 26, there is a IRS Collection Due Process. You also have the right to appeal an IRS decision, which she covered in Episode 27.
Beyoncé deducted $761,455 on her Schedule C7. The IRS disallowed that deduction. She and her advisors will have to prove the deduction was ordinary and necessary. They will also have to substantiate the deduction by showing the expense was actually paid. Timalyn advises you should always keep receipts, because your bank statements may not give the full picture.
Please consider sharing this episode with your friends and family. There are many people dealing with tax issues, and you may not know about it. This information might be helpful to someone who really needs it. After all, back taxes shouldn't ruin your life.
As we conclude Episode 28, we encourage you to connect with Timalyn on social media. You'll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America's Favorite EA and she's here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today's episode.
For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .
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Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.
