If Dakota cannot provide adequate disclosure and a reasonable basis for the understatement, he will have to pay a penalty of $400.
In this case, if Dakota cannot provide adequate disclosure and a reasonable basis for the understatement, the penalty amount would be calculated as:
Penalty Amount = 20 % of Understatement
Penalty Amount = 20 % of $2,000
Penalty Amount = 0.20 x $ 2, 000
Penalty Amount = $ 400
So, Dakota would have to pay a penalty amount of $400 if he cannot provide adequate disclosure and a reasonable basis for the $2,000 understatement in his federal income tax.
The full question is:
Dakota received a letter from the IRS indicating that his federal income tax was understated by $2,000. His corrected tax is $15,000. If Dakota cannot provide adequate disclosure and a reasonable basis for the understatement, what penalty amount will he have to pay?
$100
$400
$2,000
$3,000