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Failure To File and Substantial Understatement

Tax and Financial News

March 1999

Failure To File and Substantial Understatement

Substituting an opinion it originally issued in May 1998, the 10th Circuit has held that while "the taxpayer exercised some care in keeping up with his accounting and tax functions by increasing his accounting staff, having outside accounting firms review the tax returns, and replacing his computer system with one recommended by experts," these facts were not enough to escape imposition of the late filing penalty under IRC Sec 6661. Regarding the substantial understatement penalty, the taxpayer argued that Reg. 1.6661-2(6) was an unreasonable interpretation of the Code because even though he disclosed the item of income, he still was liable for the penalty.

Responding that the taxpayer was not entitled to the benefit for items that are properly disclosed, because the penalty in this case would have been the same even if he had properly reported the disclosed item, the court concluded that the regulation properly promotes disclosure but does not reward the disclosure "more than had the taxpayer properly reported the item." [U.S. v. Craddock, No. 95-1437 (10th Cir.)].
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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