Substantial Underpayment Penalty

[taxedtothemax]

interested in knowing if anyone has had any success getting this penalty waived. No valid excuse for the taxpayer other than not recognizing that a tax document got omitted from their return. Nothing like this had ever occurred previously. 20% on top of what is owed is painful. Appreciate any assistance.

[Nashville]

Need More Information

As usual, facts and circumstances dictate. How much was this "substantial understatement?" What was taxpayer's tax as filed, and what was the tax as recalculated? This will tell us not only the amount of tax but the percentage - both are essential to paint the picture.

Also what was the nature of the additional taxation? This can determine how easy it was for the taxpayer to overlook the additional tax. For example, brokerage statements are notorious for being missing and/or confusing - meaning the taxpayer might have a strong case.

[Kram BergGold]

My Understanding

From what I have experienced and what I have read, the only way to get an accuracy related penalty removed is to take the IRS to court. I have read a few cases in which the taxpayer prevailed in court. One time I got it removed because I was able to amend the return to get the tax under $5,000. The other 3 or 4 times I tried the IRS would not remove the penalty.

[taxedtothemax]

the income understatement was over $175,000, causing tax liability to increase from $17,000 to $81,000. Clearly, the 10%/$5,000 threshold has been met. However, they did not receive a 1099-R for the retirement plan distribution, and the funds went into their bank account and out within a matter of days to make a down payment on a land purchase. There was never an intent to under report. It was simply an over sight.

[taxedtothemax]

Thank you for your response. Doesn't sound promising but I'll beg for mercy and see where that takes us.

[Nashville]

It will be tough

To The Max:

This is gonna be tough. Clearly the threshholds are met, big time.

There can be no doubt that he knew the money came out. The question is could he know his return didn't report the income? Offhand, my estimation is if he is intelligent enough to amass this kind of money, he's probably got a suspicion that his tax bill was very low.

One possible scenario is what happens when certain preparers allow clients to walk in and dump their paperwork and then leave and say "Call me when you're through." If this happened and you were the preparer, I'm not intending that this reflect negatively on you - other than to throw open the scenario. The preparer then goes through the paperwork without the 1099-R and knows absolutely nothing about the withdrawal. A couple days later, the client comes in, signs to e-file, pays his bill and all is thought to be complete.

Many preparers do business this way, and many clients prefer not to be drug through the questions. I'm not saying this is a bad way to do business.

There is plenty of blame to go around - the client, the custodian of the retirement plan, the preparer very remotely (if at all). I'm wondering if the IRS would accept a penalty of lesser amount for negligence, otherwise I think they'll go for the 20%. The amount is large enough to engage a tax lawyer if reduction is deemed possible.

One thing is clear from our experience - they will NOT go after the custodian, although I wish they would. Imagine it is Wells Fargo, or Fidelity Investments, etc. The IRS will take the easy way out and come after your client instead of tangling with the lawyers of a fortune 500 company.

[Rapid Robert]

One possible scenario is what happens when certain preparers allow clients to walk in and dump their paperwork and then leave and say "Call me when you're through." [...] The preparer then goes through the paperwork without the 1099-R and knows absolutely nothing about the withdrawal.
[...]
One thing is clear from our experience - they will NOT go after the custodian, although I wish they would. Imagine it is Wells Fargo, or Fidelity Investments, etc.

I think it's very uncommon for a 1099-R not to be issued. Can't prove a negative, but how do we know taxpayer wasn't simply negligent with collecting year-end tax documents, some of which may be delivered online? After all, the IRS got their copy.

As for "dumping their paperwork", part of tax professional due diligence does involve reviewing some basic items. For example, all my clients must answer a Yes/No questionnaire which includes the question "Did you buy or sell any real estate during the year?", and well as "Did you take any retirement distributions?"

[Roland Slugg]

They did not receive a 1099-R for the retirement plan distribution.

Are you sure?

[TAXNJ]

... However, they did not receive a 1099-R for the retirement plan distribution, and the funds went into their bank account and out within a matter of days to make a down payment on a land purchase.

No 1099 but at least they received the $. That's better then getting a 1099 and no $.

As other reply posts, think you have a tough case.