Final answer:
The negligence penalty for understatement of tax is imposed on taxpayers who have understated their tax due to a failure in exercising reasonable care. This penalty is designed to promote accurate tax filings and can amount to 20% of the underreported amount. Although audit rates have decreased recently, the penalty still applies when understatements are identified.
Step-by-step explanation:
The negligence penalty with respect to understatement of tax is a penalty imposed on taxpayers who have understated their tax due to negligence.
This means that the correct answer to the student's question is option 1) A penalty imposed on taxpayers who have understated their tax due to negligence. In the United States, when an individual like John S.
Loppe fails to report the correct amount of tax due because they did not exercise reasonable care or due diligence, the Internal Revenue Service (IRS) may impose a negligence penalty.
This penalty is designed to encourage taxpayers to be more careful in their tax filings and can amount to 20% of the portion of the underpayment that is attributable to the negligence.
In recent decades, the likelihood of a citizen's taxes being audited has dropped, particularly among high-income individuals.
This is because the federal government has devoted fewer resources to enforcement activities, leading to a lower rate of audits and thus a reduced immediate risk for tax understatements going detected; however, if an understatement is discovered, the penalty would still apply.