Chapter 12, Problem 3P

a.

To determine

Introduction: The Internal Revenue Service (IRS) has a wide range of functions and responsibilities such as look after of administration of federal taxes, and to perform duties like estimating, determining, and collecting taxes in the form of revenue to the government, it also performs tax return audits and imposes penal provisions. It is the office within the revenue department. The task of the department is to provide the taxpayers with quality service by assisting them in proving knowledge content so the taxpayers understand their tax responsibility and pay taxes timely. It is important in maintaining and establishing tax laws.

The amount of W’s failure to pay penalty.

Answer to Problem 3P

The amount of W’s failure-to-pay penalty will be $\boxed{\text{\$7}}$ .

Explanation of Solution

The income tax law provides for several penal provisions to ensure accurate compliance with the tax laws and in paying timely taxes. These are considered an additional amount charged over and above of taxes due thus is not allowed for deduction. In cases where failure-to-pay taxes on or before return filing due date by the taxpayer, it may attract a penalty of paying 50 percent amount of 1 percent due tax amount for each month and part of it up to the month of late payment, which can be maximum up to 25 percent of the due tax amount. This penalty can rise to a percent each month starting after the notice is served to the taxpayer of such levy.

In the given situation, W has filed his return on time but has not deposited his tax dues with the tax return and deposits the same after 2 months of return filing. So W is likely to pay a failure-to-pay penalty as described above.

Thus, the failure-to-pay penalty will be calculated as follows:

  $\begin{array}{l}\text{=\$700}\times \frac{1}{2}\times \frac{1}{100}\times 2\\ \text{=\$7}\end{array}$

Therefore, the amount of W’s failure-to-pay penalty will be $\boxed{\text{\$7}}$ .

b.

To determine

Introduction: The Internal Revenue Service (IRS) has a wide range of functions and responsibilities such as look after of administration of federal taxes, and to perform duties like estimating, determining, and collecting taxes in the form of revenue to the government, it also performs tax return audits and imposes penal provisions. It is the office within the revenue department. The task of the department is to provide the taxpayers with quality service by assisting them in proving knowledge content so the taxpayers understand their tax responsibility and pay taxes timely. It is important in maintaining and establishing tax laws.

The total amount of J’s penalty.

Answer to Problem 3P

The amount of total penalty to be paid by J is $\boxed{\text{\$187}\text{.5}}$ .

Explanation of Solution

The income tax law provides for several penal provisions to ensure accurate compliance with the tax laws and in paying timely taxes. These are considered an additional amount charged over and above of taxes due thus is not allowed for deduction. In cases where failure-to-pay taxes on or before return filing due date by the taxpayer, it may attract a penalty of paying 50 percent amount of 1 percent due tax amount for each month and part of it up to the month of late payment, which can be maximum up to 25 percent of the due tax amount. This penalty can rise to a percent each month starting after the notice is served to the taxpayer of such levy.

In the event of failure-to-file the return, the taxpayer has to pay a 5 percent penalty each month and part of it, this amount can go 25 percent maximum of the amount of due taxes. In a situation where it is found taxpayer is fraudulently trying to escape the taxes, this penalty can go up by 5 percent every month and part thereof up to 15 percent, and maximum it get from 25 to 75 percent. After the notice served if fails to deposit the amount within 60 days, the taxpayer is considered liable to pay a lower of $210 or the due tax amount as per the tax return.

If a taxpayer does not file his or her tax return and also not deposited the taxes then in such cases the failure-to-file penalty is reduced from 5 to 4.5 percent so that combined penalty will be equal to 5 percent and it can go up to a maximum of 25 percent for the first 5 months and after 5 months failure-to-pay penalty will be applicable again for additional 45 months. Therefore, the maximum penalty is equal to 47.5 percent.

If the taxpayer has not any tax due or has a refund to be claimed then in such cases both the penalties will be zero on the late-filed tax returns. The taxpayer will not be assessed in case he or she has reasonable cause for not paying or not filing a tax return on time.

In the given situation J had not filed her tax return on time and also not deposited her tax dues. Later, J filed her tax return after 4 and a half month and also paid her taxes amounting to $750. So J is likely to pay both failure-to-file as well as a failure-to-pay penalty as described above.

Thus, the combined penalty of J will be calculated as follows:

  $\begin{array}{l}\text{=\$750}\times \frac{25}{100}\\ \text{=\$187}\text{.5}\end{array}$

Therefore, the amount of the total penalty to be paid by J is $\boxed{\text{\$187}\text{.5}}$ .

c.

To determine

Introduction: The Internal Revenue Service (IRS) has a wide range of functions and responsibilities such as look after of administration of federal taxes, and to perform duties like estimating, determining, and collecting taxes in the form of revenue to the government, it also performs tax return audits and imposes penal provisions. It is the office within the revenue department. The task of the department is to provide the taxpayers with quality service by assisting them in proving knowledge content so the taxpayers understand their tax responsibility and pay taxes timely. It is important in maintaining and establishing tax laws.

The amount of Ja’s penalty.

Answer to Problem 3P

The amount of penalty to be paid by Ja is $\boxed{\$0}$ .

Explanation of Solution

The income tax law provides for several penal provisions to ensure accurate compliance with the tax laws and in paying timely taxes. These are considered an additional amount charged over and above of taxes due thus is not allowed for deduction. In cases where failure-to-pay taxes on or before return filing due date by the taxpayer, it may attract a penalty of paying 50 percent amount of 1 percent due tax amount for each month and part of it up to the month of late payment, which can be maximum up to 25 percent of the due tax amount. This penalty can rise to a percent each month starting after the notice is served to the taxpayer of such levy.

In the event of failure-to-file the return, the taxpayer has to pay a 5 percent penalty each month and part of it, this amount can go 25 percent maximum of the amount of due taxes. In a situation where it is found taxpayer is fraudulently trying to escape the taxes, this penalty can go up by 5 percent every month and part thereof up to 15 percent, and maximum it get from 25 to 75 percent. After the notice served if fails to deposit the amount within 60 days, the taxpayer is considered liable to pay a lower of $210 or the due tax amount as per the tax return.

If a taxpayer does not file his or her tax return and also not deposited the taxes then in such cases the failure-to-file penalty is reduced from 5 to 4.5 percent so that combined penalty will be equal to 5 percent and it can go up to a maximum of 25 percent for the first 5 months and after 5 months failure-to-pay penalty will be applicable again for additional 45 months. Therefore, the maximum penalty is equal to 47.5 percent.

If the taxpayer has not any tax due or has a refund to be claimed then in such cases both the penalties will be zero on the late-filed tax returns. The taxpayer will not be assessed in case he or she has reasonable cause for not paying or not filing a tax return on time.

In the given situation, Ja has filed his tax return after 2 months and 3 days of the original due date and his return shows a refund of $50 from the IRS. In this situation, Ja has not to pay any penalty as on the late return having refunds due will not attract any penalty.

Therefore, the amount of penalty to be paid by Ja is $\boxed{\$0}$ .