Accuracy penalty after audit

[Jack from Ohio]

Just received a final 2008 audit report. $2,300 increased tax due to audit. Accuracy penalty of $461 or 20%.

My question... Is the accuracy penalty mandatory or discretionary? Seems that not all final audit reports have this assessed.

[pcmcpa]

Just received a final 2008 audit report. $2,300 increased tax due to audit. Accuracy penalty of $461 or 20%.

My question... Is the accuracy penalty mandatory or discretionary? Seems that not all final audit reports have this assessed.

This is from the IRS Manual:

20.1.5.4 (07-01-2008)

Post-Assessment Abatement Consideration of the Accuracy-Related Penalties

Whenever a taxpayer has the benefit of Service contact with respect to an examination and is afforded the opportunity to provide documentation to explain unreported income, but does not contact the Service, we issue the statutory notice showing additional tax and applicable penalties.

When the notice defaults and no taxpayer contact was made, the tax, penalties and interest are assessed.

If a taxpayer receives notice and demand for payment and then makes his/her first response to the Service requesting abatement of the accuracy-related penalties (while not disputing the tax liability and not requesting or not being eligible for audit reconsideration procedures), abatement should be considered based on the evidence provided.

The function responsible for the penalty assessment should decide whether the penalty should be abated.

If the evidence is not sufficient to support a reasonable cause claim for the penalty abatement, the taxpayer should be issued the appropriate letter to indicate that the abatement request is denied and the remaining recourse is to pay the tax, penalties and interest and file a claim for refund on Form 843, Claim for Refund and Request for Abatement.

Post-assessment consideration of IRC section 6662 and 6662A accuracy related penalty abatement requests are not forwarded to Appeals.

[jainen]

>>Is the accuracy penalty mandatory or discretionary?<<

The auditor has a lot of discretion, which is why it is so important to establish a respectful, professional relationship during the audit. The accuracy penalty is imposed by statute, but can be abated for reasonable cause. So tell us--why did your tax prep so greatly understate your client's actual tax liability? Can you show that your client made a bona fide effort to comply with the tax code?

[Jack from Ohio]

>>Is the accuracy penalty mandatory or discretionary?<<

The auditor has a lot of discretion, which is why it is so important to establish a respectful, professional relationship during the audit. The accuracy penalty is imposed by statute, but can be abated for reasonable cause. So tell us--why did your tax prep so greatly understate your client's actual tax liability? Can you show that your client made a bona fide effort to comply with the tax code?

We did not prepare the return being audited. These clients were ours for about 8 years thru 2007, then chose to "save money" and do two years themselves. Jan. 2011 we get a frantic call about them being audited for 2009. Their home business showed a $26K loss. We would never have allowed such a loss on about $22K of business income. "Do It Yourself" said all was OK.

Needless to say, they let us do 2010 and will be our clients for life now. "Do it yourself" cost them $15K in additional taxes, interest and penalties, because they cannot document where all the deposits in their checking account originated, on top of the mistakes on the returns that were overlooked by "the box."

The auditor was leaning toward auditing 2008. We have given him every detail he asked for that the clients were able to provide, and think we may dodge that bullet by "...establish a respectful, professional relationship during the audit."

I just love "Do It Yourself" tax software!:D

[jainen]

>>they cannot document where all the deposits in their checking account originated<<

And you took them back anyway? I assume you aren't giving these tax cheats any special discounts on your prep fees. Did they at least learn not to deposit the cash they aren't going to declare?

[joanmcq]

'The box' only takes what they put in...GIGO. If they are like the DIY people I've seen audited, they have no idea what they entered or what was on the return. Just saw the green refund meter go up and thought they were all good. And probably even thought 'the box' was finding them all sorts of deductions their accountant didn't know about. lol.

[jainen]

>>they have no idea what they entered<<

The tax system is so unfair to small businesses. How are they supposed to keep track of every piddling $48,000?