Academic journal article Journal of Accountancy

Penalty Calculation Properly Based on Erroneous Credits, Tax Court Holds

Academic journal article Journal of Accountancy

Penalty Calculation Properly Based on Erroneous Credits, Tax Court Holds

Article excerpt

The Tax Court held that the amount of tax shown on a return was reduced by refundable credits, but not below zero, for purposes of calculating the Sec. 6662(a) accuracy-related penalty The court reached that conclusion even though the taxpayers were not entitled to the credits they had claimed.

The husband-and-wife taxpayers had filed returns for 2006, 2007, and 2008, for which the IRS sent notices of deficiency The issues arising in the 2006 and 2007 tax years were settled by stipulation, and only the issues for 2008 were before the Tax Court. The taxpayers had claimed an earned income tax credit (EITC) and an additional child tax credit, both of which they agreed they were not entitled to. The issue before the court was how to determine the amount of "tax required to be shown on [the] return," for purposes of applying the 20% Sec. 6662(a) penalty.

The taxpayers reported $18,148 of income on the return, including the wife's $1,020 from self-employment as a tutor. A $10,900 standard deduction and $14,000 of personal exemptions reduced their taxable income to zero. They showed a tax on their return of $144 for the wife's self-employment tax.

The taxpayers argued that the 20% penalty should be applied to the $144 of tax, but the IRS claimed that the penalty should apply to the full amount of the taxpayer's deficiency, including the disallowed refundable credits, so that the base for the penalty was $8,127, resulting in a Sec. 6662(a) penalty of $1,625.

The Tax Court, however, came up with its own interpretation. The tax shown on the return, the Tax Court concluded, should be reduced by the credits at issue in this case, but not below zero. …

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