Under reporting income

[Skate1968]

Question

A waitress gets audited. Single Mom, three kids They find she has 26,000 of unreported tip income.

What's the penalty? (i've always stayed far away from anything like this)

Does over 25K mean fraud? Is it possible that she wont face fraud charges and the IRS will allolw her a workout plan? Is she necessarily going to jail? (i doubt it)

If i remember correctly a cpa can be charged with fraud if his client under reported 2X,XXX$ of income AND it can be proven that the cpa was aware of this and signed a return.

Usually i just look this stuff up myself but i'm exausted.

thanks

[Bees Knees]

There is always interest charged on the underpayment of tax, along with a failure to pay penalty under Section 6651 equal to 0.5% of the tax due per month it is underpaid, not to exceed 25%.

In addition to the above, there is an accuracy related penalty equal to 20% of the tax due if there is a substantial understatement of tax, which is defined as more than the greater of 10% of the actual amount due or $5,000.

So if the additional tax due on the $26,000 exceeds the greater of 10% of the total tax or $5,000, then the extra 20% penalty kicks in.

There is no dollar amount that determines fraud. It is a facts and circumstance thing. $26K could seem like fraud, especially if it was 50% of her total income. But a multi million dollar business under reporting $26K could be just a bookkeeping error. So it all depends.

[veritas]

I'm going to assume that eic was claimed on the tax return. She will loose the right to claim eitc going forward for either two up to ten years.

[WhiteOleander]

I'm going to assume that eic was claimed on the tax return. She will loose the right to claim eitc going forward for either two up to ten years.

I know this is the law. But has anyone had any client that has had this penalty imposed? I heard that the IRS rarely does this because Congress doesn't really want the IRS to use it. Too much bad PR for them. They just want the public to think it will happen.

I haven't ever seen anyone with this on their account.

[DTS]

Eic

I would think they would impose this in severe cases of fraud, like the welfare queens. I'm like you, I think they just throw this out there to make people aware and be careful.

Lot of good it's doing!

Dennis

[veritas]

Your probably right.

[Snaggletooth]

Palindrome

yes Veritas, we know who your mystery man is -- from the old 50s TV series, "Have Gun, Will Travel" starring Richard Boone. The chorus goes "Palindrome, Palindrome, where do you roam???"

Palindrome? Google it up if you please -- a word or phrase which spells the same forward or backward.

I was a contributor - I named my Daughter "Anna." She calls me "Pop" and her other parent she calls "Mom." Sometimes it can get more complex:

"Ed is on no side."

[veritas]

Have Gun Will Travel

I have the song stuck in my head all day long.

They need to make a movie. Wonder why no one has yet. Who could play Paladin?


"I prefer pi"

[Black Bart]

Say Skate,

Question

A waitress...has 26,000...tip income.

Do you happen to know if they're needing any extra help at that cafe?

HAVE WIFE, WILL TRAVEL
WIRE BART - DOGPATCH

[Black Bart]

Oh yeah - about your question...

Sorry -- I get carried away with myself on occasion.

I agree with the boys above on this one. I've never never seen or heard of a criminal fraud penalty imposed on a case like yours. But I did have a client years ago who left off enough income (about like yours) that it was fairly obvious he had done it on purpose. In that case, the IRS agent charged him a civil fraud penalty -- I think it was 50% of the tax at that time and has gone up 75% or more since then.

Funny thing though; the agent never mentioned the fact that she was charging him with that either to him or me. She just sent him a report to sign and a bill to pay, so it wasn't bad except for having to pay the extra money. The Revenue Agent's Report listed it and he said "Hey, I didn't do no fraudin'," which was a lot of baloney.

Anyway, I don't think they'll put her in jail, but she'll probably be out some serious dough.

[Jiggers]

Preparer Penalty

Did you question your client about "tips" if you knew she was a waitress? If not, you may have a preparer penalty.

[Skate1968]

Did you question your client about "tips" if you knew she was a waitress? If not, you may have a preparer penalty.

Jiggers and everyone,
I sincerely thanks you all for your responses-- voices of experience. But this is a hypothetical question that i had discussed with people (should have made that more clear). And I wanted to know if my statements to them were reasonalbe and applicable.

Jiggers,
Yes, I do know enough that signing the return of a waitress who reports no tip income is not adviseable. In fact I believe that this 'hypothetical scenario' could be an outdated. (Doesn't a waitress's W2 earnings often include estimated Tip Income.)

[Bees Knees]

(Doesn't a waitress's W2 earnings often include estimated Tip Income.)

The waitress is supposed to report all tips to the employer, who in turn includes tip income in box 1 of the W-2.

A different box on the W-2 for allocated tips only applies when the waitress does not report enough tips to the employer to meet the percentage of tips to gross receipts of the employer. In other words, IRS might say tips in your cafe should average 8% of total receipts. Therefore, any waitress not reporting tips of at least 8% of her total receipts will have the difference reported on her W-2 as allocated tips. If she doesn't want to pay tax on the allocated tips, she needs an actual log book proving that her actual tips were less than 8% of gross receipts.

[Jiggers]

Tips

What about a beautician receiving a W-2? Or hairstylist? They are supposed to report tips also. And, you need to ask that question during the interview.

And, at a local military base, when I have accompanied my mother to the commissaary, she tips the person carrying out her groceries. That should also be reported.

My questionaire has that question: "Did you receive any tips not reported on your W-2?" If they answer no and are later audited, no skin off my back.

[DaveO]

EITC Penalty

I know this is the law. But has anyone had any client that has had this penalty imposed? I heard that the IRS rarely does this because Congress doesn't really want the IRS to use it. Too much bad PR for them. They just want the public to think it will happen.

I haven't ever seen anyone with this on their account.

I have on a 5 year denial. It was a real pain to settle out. The TP had been audited in a MFJ year and was denied the credit. Later divorced, EX died then he has the kids. The IRS sarted with denying the EITC. When we reapplied they kicked out the dependency exemptions and HOH status too. We submitted utility bills, ex's death certificate, letter from principal, doctor/dentist bills, etc. After stalling out in appeals for 3 months we filed with the Advocate service. It seems appeals thought he couldn't prove support since the kids were getting SS survivor benefits. We finally got it resolved and he got the EITC for that year. Happily, his income is now well over the EITC limits.