 Hello, and welcome to the session. This is Professor Farhad. In the session, I would look at taxpayer penalties part one of two. This topic is typically covered in an in-compact course, the CPA exam rec section, as well as the enrolled agent exam. As always, I would like to remind you to connect with me on LinkedIn. Let's get that money back. What they would do, as a taxpayer does not make a good faith estimate and pivot, the extension itself may be voided. Simply put, they would say, well, we don't accept that extension. Okay, so when the return is filed by extended due date with a much larger amount due than had been estimated. Just basically they will not accept that extension. So here in practice, just a little bit more to be on the safe side. Now, like during any month, sometime what happened, not sometime, both taxes would apply. During any month in which both failure to file penalty and failure to pay apply, the failure to file penalty is reduced by the amount of the failure to pay. So the failure to pay is basically is given as a credit. And let's work an example to see how this work. Jason filed his tax return 10 days after the due date. It doesn't matter. It's less than a month. They are late one month. Along with the return, he remits a check for $5,000. So that's what was due, which is the balance of the tax he owes this regarding any interest liability. So we're going to ignore interest. Jason total penalties are as follow. Failure to pay is 0.5 times 5,000, which is $25. Failure to file 5,000 times 5,250. Now, what's going to happen? Jason will get the credit for the $25 failure to pay penalty. And failure to file penalty is net is to 25 plus the failure to pay penalty in total they'll pay 250. The penalties for one full month are imposed, even though Jason was delinquent by only 10 days. It does not matter. Unlike the method used to compute interest. Now, when we compute interest, any part of the month is treated as a whole month. So unlike the method used to compute interest. So this is its different rules and we'll talk about interest later on when we look at the penalties and the interest involved. Let's take a look at another example. Well, these penalties can be avoided. Actually, the taxpayers show the failure to file or the failure to pay was due to a reasonable cause and not due to willful neglect. Now, they don't tell us exactly what does that mean. So basically it's case by case. The IRS will determine case by case situation. Let's take a look at another example just to kind of see how this work. Alexi filed her tax return 20 days after the due date. Along with the return, she admits a check of $3,000, which is the balance of the tax she owes. This regarding any interest liabilities compute Alexi's total penalties for the period. Once again here, what we have to do is we have to assume a full month. So $3,000 times 0.5. This is for the failure to pay. Failure to pay is 0.5, which give us $15. Now there's failure to file. Again, we're going to take 3,000 times 5%, times 5%, which is 150. Once again, we're going to get a $15 credit. So it's going to be 135 plus the 15 in total. It's going to be 150. So this is the total penalties between the failure to pay and failure to file. Let's take a look at another example, which we have Rita forgot to pay her federal income tax on time. When she actually filed, she reported a balance to compute Rita's failure to file penalty in each of the following situations. Here we're talking about the penalty, which is the 5% failure to file penalty. So she was 2 months late, $1,000. Well, it's going to be 5% times 2 months times $1,000. That's going to give us $100. Well, there's a minimum. Remember, there's a minimum of 2, 15, 24. The minimum amount will apply here. So be careful on the exam. She applied 5 months late and it's $3,000. Well, failure to file penalty, 5% times 5 months times 3,000, which is 750. 8 months late, well, 8 months late, $4,000 additional tax due. Now, remember, there's a maximum. So what's the maximum? Remember, the maximum is, there's a maximum of 25%, 25%. Therefore, what's going to happen for number C? Number C, it's going to be 5% times 5. 5% times 5, not 8 times 5, because there's a maximum of 25%, times $4,000, which will be $1,000 penalty. Two and a half month late, $3,000 additional tax due. They're trying to trick you here by telling you two and a half month. Two and a half month is 3 months. So it's 5% times 3 times 3,000 equal to 450. 5 months late due to fraud. Okay, fraud, it's going to bring in 15%. And we have 5 months late. So 15 times 5. Remember, there's a limit. 15 times 5 is, well, we're right at the limit. 15 times 5 is 75, so okay, that's fine. Times 4,000 equal to 3,000 penalty. 10 months late due to fraud, 15,000 in additional taxes. Now, remember, we're 10 months late. The maximum is 75% technically. Let's do this. Well, let's assume we did, so we're going to do 15%, times 10 months, times 15,000, okay? Remember, it cannot be more than 75%. So simply put, this is more than 75%, okay? But let's assume, you know, we did this computation. We're going to come up to 22,500. Well, we can do that. We can do that. We only have to limit ourselves to 75% of the tax due and 15,000 times 0.75 is 11,250. So hopefully by looking at this example, you get an idea about failure to file penalty, failure to file. That's 5%, and there's a maximum of 25, 15% for fraud, 75% maximum. And remember, any partial month is considered a full month. Let's take a look at this example. Wade filed his federal income tax return on time, but did not remit the balance due. Compute failure to pay penalty. We're not involving interest, just failure to pay penalty in each of the following situation. Four months late, 3,000. Remember the rate, the rate is 0.5% times 3,000 times, times, I'm sorry, times four, okay? Times four month, times four month, that's going to give us $60. Now bear in mind there is no minimum, like the failure to file penalty. 10 months late, 0.5% times 10, and we owe $4,000, and that's going to be $200. Five years late, five years late, five years late. Now we have to understand five years late is, five years is 60 months. 60 months is five years late. Well, guess what? We are limited to, again, maximum of 25%. Well, what does that mean? It means to get the 25%. It's 0.5 times 50, which is, if we take 0.5 times 50, 0.5% times 50. Let me just get my calculator here. So if we take 0.005 times 50, that's going to give us 0.25, which is 25%. So that's why I limited to 25%. That's 25% times 5,000 equal to 1,250. So that's the maximum. So hopefully we know how to compute failure to pay and failure to file penalty. Just real quick, civil fraud penalty. Just FYI, something you need to know about civil fraud penalty. 75% civil penalty is imposed on underpayment resulting from fraud by the taxpayer who filed a return. Now, what is a fraud? It's like intentional wrongdoing. You did not make a mistake. You were not negligent. And you did this over several years. So you're doing this. Now, you have to keep in mind the initial burden of proof is on the IRS to show that the taxpayer acted in a way to specifically intend to evade the tax. So first, the IRS has to prove it. Once they prove it, then you have to prove that you did not commit fraud. So once the IRS initially has established that fraud, the taxpayer then bears the burden of proof to show the evidence of the portion, the underpayment that's not attributable to fraud. So first, they have to show fraud, then you have to defend yourself. So Frank underpaid his taxes by 90,000. The IRS can prove 60,000 were underpayment due to fraud. Well, the civil penalty is 60,000 times 75%. Now, in the next session, what I will do is I will cover another common tax penalty, which is failure to pay estimated taxes. Those are the common topics that are tested on the CPA exam. As always, I would like to remind you to visit my website. If you are serious about studying for your CPA exam, subscribe. I have a lot of resources that's going to help you pass. You invest in your career once, and it's a 40 to 50 year investment. Go ahead, subscribe. You might have a course, but you might need that additional help that's going to boost your score 7 to 10 points that's going to get you over that 75. Study hard. I'm always here to help you and good luck.