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2007 tax 7. 2007 tax Figuring Gross Profit Table of Contents Introduction Items To Check Testing Gross Profit AccuracyExample. 2007 tax Additions to Gross Profit Introduction After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), you are ready to figure your gross profit. 2007 tax You must determine gross profit before you can deduct any business expenses. 2007 tax These expenses are discussed in chapter 8. 2007 tax If you are filing Schedule C-EZ, your gross profit is your gross receipts plus certain other amounts, explained later under Additions to Gross Profit. 2007 tax Businesses that sell products. 2007 tax If you are filing Schedule C, figure your gross profit by first figuring your net receipts. 2007 tax Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). 2007 tax Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price. 2007 tax Next, subtract the cost of goods sold (line 4) from net receipts (line 3). 2007 tax The result is the gross profit from your business. 2007 tax Businesses that sell services. 2007 tax You do not have to figure the cost of goods sold if the sale of merchandise is not an income-producing factor for your business. 2007 tax Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). 2007 tax Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way. 2007 tax Illustration. 2007 tax This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured. 2007 tax Income Statement Year Ended December 31, 2013 Gross receipts $400,000 Minus: Returns and allowances 14,940 Net receipts $385,060 Minus: Cost of goods sold 288,140 Gross profit $96,920 The cost of goods sold for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900 Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider the following items before figuring your gross profit. 2007 tax Gross receipts. 2007 tax At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. 2007 tax You may find it helpful to use cash registers to keep track of receipts. 2007 tax You should also use a proper invoicing system and keep a separate bank account for your business. 2007 tax Sales tax collected. 2007 tax Check to make sure your records show the correct sales tax collected. 2007 tax If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts. 2007 tax If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income. 2007 tax Inventory at beginning of year. 2007 tax Compare this figure with last year's ending inventory. 2007 tax The two amounts should usually be the same. 2007 tax Purchases. 2007 tax If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc. 2007 tax ) be sure to remove them from the cost of goods sold. 2007 tax For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6. 2007 tax Inventory at end of year. 2007 tax Check to make sure your procedures for taking inventory are adequate. 2007 tax These procedures should ensure all items have been included in inventory and proper pricing techniques have been used. 2007 tax Use inventory forms and adding machine tapes as the only evidence for your inventory. 2007 tax Inventory forms are available at office supply stores. 2007 tax These forms have columns for recording the description, quantity, unit price, and value of each inventory item. 2007 tax Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. 2007 tax These forms will help satisfy you that the total inventory is accurate. 2007 tax They will also provide you with a permanent record to support its validity. 2007 tax Inventories are discussed in chapter 2. 2007 tax Testing Gross Profit Accuracy If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. 2007 tax First, divide gross profit by net receipts. 2007 tax The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price. 2007 tax Next, compare this percentage to your markup policy. 2007 tax Little or no difference between these two percentages shows that your gross profit figure is accurate. 2007 tax A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. 2007 tax You should determine the reason for the difference. 2007 tax Example. 2007 tax Joe Able operates a retail business. 2007 tax On the average, he marks up his merchandise so that he will realize a gross profit of 331/3% on its sales. 2007 tax The net receipts (gross receipts minus returns and allowances) shown on his income statement is $300,000. 2007 tax His cost of goods sold is $200,000. 2007 tax This results in a gross profit of $100,000 ($300,000 − $200,000). 2007 tax To test the accuracy of this year's results, Joe divides gross profit ($100,000) by net receipts ($300,000). 2007 tax The resulting 331/3% confirms his markup percentage of 331/3%. 2007 tax Additions to Gross Profit If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. 2007 tax The result is gross business income. 2007 tax If you use Schedule C-EZ, include the income on line 1 of the schedule. 2007 tax Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. 2007 tax Prev Up Next Home More Online Publications
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2007 tax 7. 2007 tax Filing Information Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: What, When, and Where To FileResident Aliens Nonresident Aliens Amended Returns and Claims for Refund Other Forms You May Have To File PenaltiesCivil Penalties Criminal Penalties Introduction This chapter provides the basic filing information that you may need. 2007 tax Topics - This chapter discusses: Forms aliens must file, When and where to file, Penalties, and Amended returns and claims for refund. 2007 tax Useful Items - You may want to see: Forms (and Instructions) 1040 U. 2007 tax S. 2007 tax Individual Income Tax Return 1040A U. 2007 tax S. 2007 tax Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1040NR U. 2007 tax S. 2007 tax Nonresident Alien Income Tax Return 1040NR-EZ U. 2007 tax S. 2007 tax Income Tax Return for Certain Nonresident Aliens With No Dependents See chapter 12 for information about getting these forms. 2007 tax What, When, and Where To File What return you must file as well as when and where you file that return, depends on your status at the end of the tax year as a resident or a nonresident alien. 2007 tax Resident Aliens Resident aliens should file Form 1040EZ, 1040A, or 1040 at the address shown in the instructions for that form. 2007 tax The due date for filing the return and paying any tax due is April 15 of the year following the year for which you are filing a return (but see the Tip, later). 2007 tax Under U. 2007 tax S. 2007 tax immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status. 2007 tax Extensions of time to file. 2007 tax You are allowed an automatic extension to June 15 to file if your main place of business and the home you live in are outside the United States and Puerto Rico on April 15. 2007 tax You can get an extension of time to October 15 to file your return if you get an extension by April 15 (June 15 if you qualify for the June 15 extension). 2007 tax Use Form 4868 to get the extension to October 15. 2007 tax In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers). 2007 tax To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. 2007 tax Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 You will not receive any notification from the IRS unless your request is denied for being untimely. 2007 tax The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U. 2007 tax S. 2007 tax citizens and resident aliens abroad who expect to qualify for special tax treatment). 2007 tax If the due date for filing falls on a Saturday, Sunday, or legal holiday, the due date is the next day which is not a Saturday, Sunday, or legal holiday. 2007 tax You may be able to file your return electronically. 2007 tax See IRS e-file in your form instructions. 2007 tax Nonresident Aliens Nonresident aliens who are required to file an income tax return should use Form 1040NR or, if qualified, Form 1040NR-EZ. 2007 tax If you are any of the following, you must file a return. 2007 tax A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during 2013. 2007 tax (But see Exceptions , later. 2007 tax ) You must file even if: Your income did not come from a trade or business conducted in the United States, You have no income from U. 2007 tax S. 2007 tax sources, or Your income is exempt from income tax. 2007 tax A nonresident alien individual not engaged in a trade or business in the United States with U. 2007 tax S. 2007 tax income on which the tax liability was not satisfied by the withholding of tax at the source. 2007 tax A representative or agent responsible for filing the return of an individual described in (1) or (2). 2007 tax A fiduciary for a nonresident alien estate or trust. 2007 tax You must also file if you want to: Claim a refund of overwithheld or overpaid tax, or Claim the benefit of any deductions or credits. 2007 tax For example, if you have no U. 2007 tax S. 2007 tax business activities but have income from real property that you choose to treat as effectively connected income (discussed in chapter 4), you must timely file a true and accurate return to take any allowable deductions against that income. 2007 tax For information on what is timely, see When to file for deductions and credits under When To File, later. 2007 tax Exceptions. 2007 tax You do not need to file Form 1040NR or Form 1040NR-EZ if you meet either of the following conditions. 2007 tax Your only U. 2007 tax S. 2007 tax trade or business was the performance of personal services, and Your wages were less than $3,900, and You have no other need to file a return to claim a refund of overwithheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty. 2007 tax You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa and you have no income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. 2007 tax Even if you have left the United States and filed a Form 1040-C, U. 2007 tax S. 2007 tax Departing Alien Income Tax Return, on departure, you still must file an annual U. 2007 tax S. 2007 tax income tax return. 2007 tax If you are married and both you and your spouse are required to file, you must each file a separate return. 2007 tax Form 1040NR-EZ You can use Form 1040NR-EZ if all of the following conditions are met. 2007 tax You do not claim any dependents. 2007 tax You cannot be claimed as a dependent on someone else's U. 2007 tax S. 2007 tax tax return. 2007 tax If you were married, you do not claim an exemption for your spouse. 2007 tax Your taxable income is less than $100,000. 2007 tax The only itemized deduction you can claim is for state and local income taxes. 2007 tax Note. 2007 tax Residents of India who were students or business apprentices may be able to take the standard deduction instead of the itemized deduction for state and local income taxes. 2007 tax See chapter 5. 2007 tax Your only U. 2007 tax S. 2007 tax source income is from wages, salaries, tips, taxable refunds of state and local income taxes, scholarship or fellowship grants, and nontaxable interest or dividends. 2007 tax (If you had taxable interest or dividend income, you cannot use this form. 2007 tax ) You are not claiming any adjustments to income other than the student loan interest deduction or scholarship and fellowship grants excluded. 2007 tax You are not claiming any tax credits. 2007 tax This is not an “expatriation return. 2007 tax ” See Expatriation Tax in chapter 4. 2007 tax The only taxes you owe are: The income tax from the Tax Table. 2007 tax The social security and Medicare tax from Form 4137 or Form 8919. 2007 tax You are not claiming a credit for excess social security and tier 1 RRTA tax withheld. 2007 tax You are not filing Form 8959, to figure the amount of Additional Medicare Tax you owe and/or the amount of Additional Medicare Tax withheld by your employer, if any. 2007 tax If you do not meet all of the above conditions, you must file Form 1040NR. 2007 tax When To File If you are an employee and you receive wages subject to U. 2007 tax S. 2007 tax income tax withholding, you will generally file by the 15th day of the 4th month after your tax year ends. 2007 tax For the 2013 calendar year, file your return by April 15, 2014. 2007 tax If you are not an employee who receives wages subject to U. 2007 tax S. 2007 tax income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. 2007 tax For the 2013 calendar year, file your return by June 16, 2014 (because June 15 is a Sunday. 2007 tax ) Extensions of time to file. 2007 tax If you cannot file your return by the due date, file Form 4868 or use one of the electronic filing options explained in the Form 4868 instructions. 2007 tax For the 2013 calendar year, this will extend the due date to October 15, 2014 (December 15, 2014, if the regular due date of your return is June 16, 2014). 2007 tax You must file the extension by the regular due date of your return. 2007 tax In addition to the 6-month extension to October 15, taxpayers whose main place of business is outside the United States and Puerto Rico and who live outside those jurisdictions can request a discretionary 2-month extension of time to file their returns (to December 15 for calendar year taxpayers). 2007 tax To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. 2007 tax Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 You will not receive any notification from the IRS unless your request is denied for being untimely. 2007 tax When to file for deductions and credits. 2007 tax To get the benefit of any allowable deductions or credits, you must timely file a true and accurate return. 2007 tax For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. 2007 tax However, if you did not file a 2012 tax return and 2013 is not the first year for which you are required to file one, your 2013 return is timely for this purpose if it is filed by the earlier of: The date that is 16 months after the due date for filing your 2013 return, or The date the IRS notifies you that your 2013 return has not been filed and that you cannot claim certain deductions and credits. 2007 tax The allowance of the following credits is not affected by this time requirement. 2007 tax Credit for withheld taxes. 2007 tax Credit for excise tax on certain uses of gasoline and special fuels. 2007 tax Credit for tax paid by a mutual fund (or other regulated investment company) or a real estate investment trust on undistributed long-term capital gains. 2007 tax Protective return. 2007 tax If your activities in the United States were limited and you do not believe that you had any gross income effectively connected with a U. 2007 tax S. 2007 tax trade or business during the year, you can file a protective return (Form 1040NR) by the deadline explained above. 2007 tax By filing a protective return, you protect your right to receive the benefit of deductions and credits in the event it is later determined that some or all of your income is effectively connected. 2007 tax You are not required to report any effectively connected income or any deductions on the protective return, but you must give the reason the return is being filed. 2007 tax If you believe some of your activities resulted in effectively connected income, file your return reporting that income and related deductions by the regular due date. 2007 tax To protect your right to claim deductions or credits resulting from other activities, attach a statement to that return explaining that you wish to protect your right to claim deductions and credits if it is later determined that the other activities produced effectively connected income. 2007 tax You can follow the same procedure if you believe you have no U. 2007 tax S. 2007 tax tax liability because of a U. 2007 tax S. 2007 tax tax treaty. 2007 tax Be sure to also complete item L on page 5 of Form 1040NR. 2007 tax Waiver of filing deadline. 2007 tax The IRS may waive the filing deadline if you establish that, based on the facts and circumstances, you acted reasonably and in good faith in failing to file a U. 2007 tax S. 2007 tax income tax return (including a protective return) and you cooperate with the IRS in determining your U. 2007 tax S. 2007 tax income tax liability for the tax year for which you did not file a return. 2007 tax Where To File If you are not enclosing a payment, file Form 1040NR-EZ and Form 1040NR at the following address. 2007 tax Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 If enclosing a payment, mail your return to: Internal Revenue Service P. 2007 tax O. 2007 tax Box 1303 Charlotte, NC 28201-1303 Aliens from the U. 2007 tax S. 2007 tax Virgin Islands. 2007 tax If you are a bona fide resident of the U. 2007 tax S. 2007 tax Virgin Islands during your entire tax year and work temporarily in the United States, you must pay your income taxes to the U. 2007 tax S. 2007 tax Virgin Islands and file your income tax returns at the following address. 2007 tax Virgin Islands Bureau of Internal Revenue 6115 Estate Smith Bay Suite 225 St. 2007 tax Thomas, VI 00802 Report all income from U. 2007 tax S. 2007 tax sources, as well as income from other sources, on your return. 2007 tax For information on filing U. 2007 tax S. 2007 tax Virgin Islands returns, contact the U. 2007 tax S. 2007 tax Virgin Islands Bureau of Internal Revenue. 2007 tax Chapter 8 discusses withholding from U. 2007 tax S. 2007 tax wages of U. 2007 tax S. 2007 tax Virgin Islanders. 2007 tax Aliens from Guam or the Commonwealth of the Northern Mariana Islands. 2007 tax If you are a bona fide resident of Guam or the Commonwealth of the Northern Mariana Islands (CNMI) during your entire tax year, you must file your return with, and pay any tax due to, Guam or the CNMI. 2007 tax Report all income, including income from U. 2007 tax S. 2007 tax sources, on your return. 2007 tax It is not necessary to file a separate U. 2007 tax S. 2007 tax income tax return. 2007 tax Bona fide residents of Guam should file their Guam returns at the following address. 2007 tax Department of Revenue and Taxation Government of Guam P. 2007 tax O. 2007 tax Box 23607 GMF, GU 96921 Bona fide residents of the CNMI should file their CNMI income tax returns at the following address. 2007 tax Department of Finance Division of Revenue and Taxation Commonwealth of the Northern Mariana Islands P. 2007 tax O. 2007 tax Box 5234 CHRB Saipan, MP 96950 If you are not a bona fide resident of Guam or the CNMI, see Pub. 2007 tax 570, Tax Guide for Individuals With Income From U. 2007 tax S. 2007 tax Possessions, for information on where to file your return. 2007 tax Amended Returns and Claims for Refund If you find changes in your income, deductions, or credits after you mail your return, file Form 1040X, Amended U. 2007 tax S. 2007 tax Individual Income Tax Return. 2007 tax Also use Form 1040X if you should have filed Form 1040, 1040A, or 1040EZ instead of Form 1040NR or 1040NR-EZ, or vice versa. 2007 tax If you amend Form 1040NR or Form 1040NR-EZ or file the correct return, attach the corrected return (Form 1040, Form 1040NR, etc. 2007 tax ) to Form 1040X. 2007 tax Print “Amended” across the top. 2007 tax Ordinarily, an amended return claiming a refund must be filed within 3 years from the date your return was filed or within 2 years from the time the tax was paid, whichever is later. 2007 tax A return filed before the final due date is considered to have been filed on the due date. 2007 tax Other Forms You May Have To File You may be required to file information returns to report certain foreign income or assets, or monetary transactions. 2007 tax FinCen Form 105 FinCEN Form 105 (formerly Customs Form 4790), Report of International Transportation of Currency or Monetary Instruments, must be filed by each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped, currency or other monetary instruments in a total amount of more than $10,000 at one time from the United States to any place outside the United States, or into the United States from any place outside the United States. 2007 tax The filing requirement also applies to each person who receives in the United States currency or monetary instruments totaling more than $10,000 at one time from any place outside of the United States. 2007 tax The term “monetary instruments” means the following: Coin and currency of the United States or of any other country, Travelers' checks in any form, Investment securities or stock in bearer form or otherwise in such form that title to them passes upon delivery, Negotiable instruments (including checks, promissory notes, and money orders) in bearer form, endorsed without restriction, made out to a fictitious payee, or otherwise in such form that title to them passes upon delivery, and Checks, promissory notes, and money orders which are signed but on which the name of the payee has been omitted. 2007 tax However, the term does not include: Checks or money orders made payable to the order of a named person which have not been endorsed or which contain restrictive endorsements, Warehouse receipts, or Bills of lading. 2007 tax A transfer of funds through normal banking procedures (wire transfer) that does not involve the physical transportation of currency or monetary instruments is not required to be reported on FinCEN Form 105. 2007 tax Filing requirements. 2007 tax FinCEN Form 105 filing requirements follow. 2007 tax Recipients. 2007 tax Each person who receives currency or other monetary instruments in the United States must file FinCEN Form 105 within 15 days after receipt, with the Customs officer in charge at any port of entry or departure, or by mail at the following address. 2007 tax Commissioner of Customs Attention: Currency Transportation Reports Washington, DC 20229 Shippers or mailers. 2007 tax If the currency or other monetary instrument does not accompany the person entering or departing the United States, FinCEN Form 105 can be filed by mail at the above address on or before the date of entry, departure, mailing, or shipping. 2007 tax Travelers. 2007 tax Travelers must file FinCEN Form 105 with the Customs officer in charge at any Customs port of entry or departure, when entering or departing the United States. 2007 tax Penalties. 2007 tax Civil and criminal penalties are provided for failing to file a report, filing a report containing material omissions or misstatements, or filing a false or fraudulent report. 2007 tax Also, the entire amount of the currency or monetary instrument may be subject to seizure and forfeiture. 2007 tax More information. 2007 tax More information regarding the filing of FinCEN Form 105 can be found in the instructions on the back of the form. 2007 tax Form 8938 You may have to file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of specified foreign financial asset(s) if you are one of the following individuals. 2007 tax A resident alien of the United States for any part of the tax year. 2007 tax A resident alien of the United States who elects to be treated as a resident of a foreign country under the provisions of a U. 2007 tax S. 2007 tax income tax treaty. 2007 tax See Effect of Tax Treaties in chapter 1. 2007 tax A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return. 2007 tax See chapter 1 for information about this election. 2007 tax A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. 2007 tax See Publication 570, Tax Guide for Individuals With Income From U. 2007 tax S. 2007 tax Possessions, for a definition of bona fide resident. 2007 tax You must file Form 8938 if the total value of those assets exceeds an applicable threshold (the “reporting threshold”). 2007 tax The reporting threshold varies depending on whether you live in the United States, are married, or file a joint income tax return with your spouse. 2007 tax Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U. 2007 tax S. 2007 tax person. 2007 tax You may have to pay penalties if you are required to file Form 8938 and fail to do so, or if you have an understatement of tax due to any transaction involving an undisclosed foreign financial asset. 2007 tax More information about the filing of Form 8938 can be found in the separate instructions for Form 8938. 2007 tax Penalties The law provides penalties for failure to file returns or pay taxes as required. 2007 tax Civil Penalties If you do not file your return and pay your tax by the due date, you may have to pay a penalty. 2007 tax You may also have to pay a penalty if you substantially understate your tax, file a frivolous tax submission, or fail to supply your taxpayer identification number. 2007 tax If you provide fraudulent information on your return, you may have to pay a civil fraud penalty. 2007 tax Filing late. 2007 tax If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. 2007 tax The penalty is based on the tax not paid by the due date (without regard to extensions). 2007 tax The penalty is usually 5% for each month or part of a month that a return is late, but not more than 25%. 2007 tax Fraud. 2007 tax If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%. 2007 tax Return over 60 days late. 2007 tax If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. 2007 tax Exception. 2007 tax You will not have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect. 2007 tax Paying tax late. 2007 tax You will have to pay a failure-to-pay penalty of ½ of 1% (. 2007 tax 50%) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. 2007 tax This penalty does not apply during the automatic 6-month extension of time to file period, if you paid at least 90% of your actual tax liability on or before the due date of your return and pay the balance when you file the return. 2007 tax The monthly rate of the failure-to-pay penalty is half the usual rate (. 2007 tax 25% instead of . 2007 tax 50%) if an installment agreement is in effect for that month. 2007 tax You must have filed your return by the due date (including extensions) to qualify for this reduced penalty. 2007 tax If a notice of intent to levy is issued, the rate will increase to 1% at the start of the first month beginning at least 10 days after the day that the notice is issued. 2007 tax If a notice and demand for immediate payment is issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand is issued. 2007 tax This penalty cannot be more than 25% of your unpaid tax. 2007 tax You will not have to pay the penalty if you can show that you had a good reason for not paying your tax on time. 2007 tax Combined penalties. 2007 tax If both the failure-to-file penalty and the failure-to-pay penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. 2007 tax However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. 2007 tax Accuracy-related penalty. 2007 tax You may have to pay an accuracy-related penalty if you underpay your tax because: You show negligence or disregard of rules or regulations, You substantially understate your income tax, You claim tax benefits for a transaction that lacks economic substance, or You fail to disclose a foreign financial asset. 2007 tax The penalty is equal to 20% of the underpayment. 2007 tax The penalty is 40% of any portion of the underpayment that is attributable to an undisclosed noneconomic substance transaction or an undisclosed foreign financial asset transaction. 2007 tax The penalty will not be figured on any part of an underpayment on which the fraud penalty (discussed later) is charged. 2007 tax Negligence or disregard. 2007 tax The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. 2007 tax Negligence also includes failure to keep adequate books and records. 2007 tax You will not have to pay a negligence penalty if you have a reasonable basis for a position you took. 2007 tax The term “disregard” includes any careless, reckless, or intentional disregard. 2007 tax Adequate disclosure. 2007 tax You can avoid the penalty for disregard of rules or regulations if you adequately disclose on your return a position that has at least a reasonable basis. 2007 tax See Disclosure statement , later. 2007 tax This exception will not apply to an item that is attributable to a tax shelter. 2007 tax In addition, it will not apply if you fail to keep adequate books and records, or substantiate items properly. 2007 tax Substantial understatement of income tax. 2007 tax You understate your tax if the tax shown on your return is less than the correct tax. 2007 tax The understatement is substantial if it is more than the larger of 10% of the correct tax or $5,000. 2007 tax However, the amount of the understatement is reduced to the extent the understatement is due to: Substantial authority, or Adequate disclosure and a reasonable basis. 2007 tax If an item on your return is attributable to a tax shelter, there is no reduction for an adequate disclosure. 2007 tax However, there is a reduction for a position with substantial authority, but only if you reasonably believed that your tax treatment was more likely than not the proper treatment. 2007 tax Substantial authority. 2007 tax Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. 2007 tax Consideration will be given to court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin that involve the same or similar circumstances as yours. 2007 tax Disclosure statement. 2007 tax To adequately disclose the relevant facts about your tax treatment of an item, use Form 8275, Disclosure Statement. 2007 tax You must also have a reasonable basis for treating the item the way you did. 2007 tax In cases of substantial understatement only, items that meet the requirements of Revenue Procedure 2012-51, 2012-51 IRB 719 (or later update) are considered adequately disclosed on your return without filing Form 8275. 2007 tax Use Form 8275-R, Regulation Disclosure Statement, to disclose items or positions contrary to regulations. 2007 tax Transaction lacking economic substance. 2007 tax For more information on economic substance, see section 7701(o). 2007 tax Foreign financial asset. 2007 tax For more information on undisclosed foreign financial assets, see section 6662(j) or the Instructions for Form 8938. 2007 tax Reasonable cause. 2007 tax You will not have to pay a penalty if you show a good reason (reasonable cause) for the way you treated an item. 2007 tax You must also show that you acted in good faith. 2007 tax This does not apply to a transaction that lacks economic substance. 2007 tax Filing erroneous claim for refund or credit. 2007 tax You may have to pay a penalty if you file an erroneous claim for refund or credit. 2007 tax The penalty is equal to 20% of the disallowed amount of the claim, unless you can show a reasonable basis for the way you treated an item. 2007 tax However, any disallowed amount due to a transaction that lacks economic substance will not be treated as having a reasonable basis. 2007 tax The penalty will not be figured on any part of the disallowed amount of the claim that relates to the earned income credit or on which the accuracy-related or fraud penalties are charged. 2007 tax Frivolous tax submission. 2007 tax You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. 2007 tax A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. 2007 tax For more information on frivolous returns, frivolous submissions, and a list of positions that are identified as frivolous, see Notice 2010-33, 2010-17 IRB 609 available at www. 2007 tax irs. 2007 tax gov/irb/2010-17_irb/ar13. 2007 tax html. 2007 tax You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. 2007 tax This includes altering or striking out the preprinted language above the space provided for your signature. 2007 tax This penalty is added to any other penalty provided by law. 2007 tax Fraud. 2007 tax If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax. 2007 tax Failure to supply taxpayer identification number. 2007 tax If you do not include your social security number (SSN) or individual taxpayer identification number (ITIN) or the SSN or ITIN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. 2007 tax You will also be subject to a penalty of $50 if you do not give your SSN or ITIN to another person when it is required on a return, statement, or other document. 2007 tax For example, if you have a bank account that earns interest, you must give your SSN or ITIN to the bank. 2007 tax The number must be shown on the Form 1099-INT or other statement the bank sends you. 2007 tax If you do not give the bank your SSN or ITIN, you will be subject to the $50 penalty. 2007 tax (You also may be subject to “backup” withholding of income tax. 2007 tax ) You will not have to pay the penalty if you are able to show that the failure was due to reasonable cause and not willful neglect. 2007 tax Criminal Penalties You may be subject to criminal prosecution (brought to trial) for actions such as: Tax evasion, Willful failure to file a return, supply information, or pay any tax due, Fraud and false statements, or Preparing and filing a fraudulent return. 2007 tax Prev Up Next Home More Online Publications