Negligence vs. Disregard – It Matters
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Negligence vs. Disregard – It Matters

The Perturbing New Treatment of Patents Under the Tax Cut & Jobs Act (TCJA)

Negligence vs. Disregard – It Matters

Negligence vs. Disregard – It Matters in determining penalties.

Say whaaaaaaaat?

Section 6662(c) and Reg. §1.6662-3(b) provide the following definitions and guidance.

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:

  1. You fail to include income shown on an information return on his or her income tax return.
  2. 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.
  3. 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.
  4. 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:

  1. Careless if you do not exercise reasonable diligence in determining the accuracy of a return position that is contrary to a rule or regulation.
  2. Reckless if you make little or no effort to determine whether a rule or regulation exists.
  3. Intentional if you ignore a rule or regulation.

The following can be indications of negligence:

  1. Unreported or understated income.
  2. Significantly overstated deductions or credits.
  3. Careless, improper, or exaggerated deductions.
  4. Deductions that are misrepresented or mis-categorized to conceal the true nature of the deduction.
  5. Items that are unexplainable.
  6. Inadequate books and records.
  7. Substantial errors on an issue that the IRS adjusted in a prior year.
  8. Incorrect or incomplete information provided to tax preparer.
  9. 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.



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