A tax return preparer willfully attempts to understate the tax liability on a client's return by intentionally omitting income shown on a Form 1099-MISC. The preparer did not disclose this position. Which of the following penalties is the IRS most likely to assess against the preparer?

Answer options:

The greater of $1,000 or 50% of the income derived from the engagement.

The greater of $5,000 or 50% of the income derived from the engagement.

The greater of $1,000 or 75% of the income derived from the engagement.

The greater of $5,000 or 75% of the income derived from the engagement.

How to approach this question

Distinguish between 'unreasonable position' (negligence) and 'willful/reckless conduct' (fraud). Willful conduct carries the higher penalty.

Full Answer

D.The greater of $5,000 or 75% of the income derived from the engagement.✓ Correct

IRC §6694(b) imposes a penalty for willful or reckless conduct equal to the greater of $5,000 or 75% of the income derived (or to be derived) by the tax return preparer with respect to the return.

Common mistakes

Confusing the §6694(a) penalty ($1,000/50%) with the §6694(b) penalty ($5,000/75%).

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