Question

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?

a) $100
b) $400
c) $2,000
d) $3,000

Answer 1

The correct answer is B. Dakota will have to pay a penalty of $400 for the understatement of his federal income tax by $2,000 since the IRS generally charges a 20% penalty for such an understatement without reasonable basis or adequate disclosure.

Step-by-step explanation:

The correct answer to the question regarding the penalty that Dakota will have to pay for the understatement of his federal income tax is $400. The penalty for understatement of tax, assuming no reasonable basis and no adequate disclosure, is generally 20% of the amount of the understatement. Since Dakota's tax was understated by $2,000, the penalty would be 20% of that amount, which calculates to $400.

The IRS imposes these penalties to encourage taxpayers to report their tax obligations accurately. The system of graduated penalties based on the degree of fault is designed to discourage underreporting and promote compliance with tax laws. In this case, since Dakota could not provide adequate disclosure or a reasonable basis for the error, the standard penalty rate is applied to the understated amount. As such, it's important for individuals to ensure they accurately report their income and claim deductions to avoid such penalties.