02 Jun Negligence vs. Disregard – It Matters
Negligence vs. Disregard – It Matters in determining penalties.
Negligence—includes any failure to make a reasonable attempt to comply with the rules or regulations or to exercise ordinary and reasonable care in the preparation of a tax return.
It also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly.
Negligence is strongly indicated where:
- You fail to include income shown on an information return on his or her income tax return.
- You fail to make a reasonable attempt to ascertain the accuracy of a deduction, credit, or exclusion on a return, which would seem to a reasonable person to be too good to be true.
- A partner fails to treat partnership items on his or her return in a manner that is consistent with the treatment of the items by the partnership.
- A shareholder fails to treat S corporation items on his or her return in a manner that is consistent with the treatment of the items on the S corporation’s return.
Disregard—includes any careless, reckless, or intentional disregard of the rules or regulations. A disregard is:
- Careless if you do not exercise reasonable diligence in determining the accuracy of a return position that is contrary to a rule or regulation.
- Reckless if you make little or no effort to determine whether a rule or regulation exists.
- Intentional if you ignore a rule or regulation.
The following can be indications of negligence:
- Unreported or understated income.
- Significantly overstated deductions or credits.
- Careless, improper, or exaggerated deductions.
- Deductions that are misrepresented or mis-categorized to conceal the true nature of the deduction.
- Items that are unexplainable.
- Inadequate books and records.
- Substantial errors on an issue that the IRS adjusted in a prior year.
- Incorrect or incomplete information provided to tax preparer.
- State examination reports that assess a negligence penalty.
For more on the difference between these terms, please feel welcome to contact me anytime at your convenience.