New Tax Penalty Rules Passed with 2015 Extender Provisions

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Many are aware of the last minute tax “extender” provisions passed in December, 2015. But you may not be aware of the numerous other tax provisions passed in conjunction with this legislation. One of them being relative to new tax penalty rules.

The end of year legislation known as the Consolidated Appropriations Act (H.R. 2029), amended code section 6664(a)’s definition of a tax “underpayment”, to include the refundable portion of tax credits in calculating code section 6662(a) accuracy-related tax penalties. This will overrule a 2013 Tax Court decision in Rand v. Commissioner. Here, the petitioner’s return had zero tax liability but claimed refundable credits which triggered a refund of $7,327. The IRS issued a refund, but later recomputed and determined that the petitioner owed $144 (the petitioner had to repay the $7,327 and an additional $144) and assessed a penalty of $1,494.20 (20% underpayment penalty). The petitioner challenged the IRS position that the refundable credit counted as an “underpayment”; but, the court reasoned that accuracy-related penalty is on deficiencies based on how much the taxpayer underpaid the “tax required to be shown on the return” and determined that refundable credits cannot take the tax below zero for purposes of the accuracy-related penalty. Make sense? No? Not to me either. The new legislation will remedy this seemingly unfair result in the Rand case.

The new legislation also changes the penalty imposed on paid tax return preparers who engage in willful or reckless conduct by increasing it to the greater of $5,000 or 75% (previously 50%) of the preparer’s income with respect to the return.

By Dale F. Jensen, CPA