Video: Understatement Due to Unreasonable Position

In this lesson, Nick Palazzolo, CPA, dives into the repercussions of taking unreasonable positions on tax returns, specifically focusing on the understatement of tax liability due to both ordinary negligence and willful or reckless conduct. He details the penalties associated with each type of negligence, explaining the criteria for ordinary negligence including a lack of due care, and defines willful or reckless conduct as the intentional disregard of tax rules. By walking through examples, Nick clarifies how the penalties are calculated, providing a practical understanding of the financial consequences faced by tax preparers who fail to adhere to tax laws, with an emphasis on the need for due diligence and the risks of disregarding regulations.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Running through here, we've got understatement due to an unreasonable position. What's going to happen? What are the penalties? Now, these are going to be penalties you should memorize. The IRS can impose penalties on tax preparers who take unreasonable positions that result in an understatement of tax liability. So what is the penalty for ordinary negligence? And then we've got a penalty for willful or reckless conduct. We see this a little more serious. So if you just have ordinary negligence, you didn't do your due diligence. You didn't do any research. If a tax preparer's unreasonable position is due to ordinary negligence, which is just lack of due care or failure to make a reasonable attempt to comply with the tax laws, right? You just kind of threw a dart at the board and saw what happened. The penalty is going to be either the greater of a thousand dollars or 50 percent of the income that the preparer received for preparing the return. And the penalty for willful or reckless conduct if a tax preparer's unreasonable position is due to willful or reckless conduct, which is intentionally disregarding. So this is more kind of getting towards fraud. Likely wouldn't be fraud yet, but slowly moving its way towards fraud. Intentional disregard, showing a reckless disregard for the rules. The penalty is going to be the greater of five thousand dollars or seventy five percent of the income that the preparer received for preparing the return. You know, one confusing thing is remembering the penalties for taxpayers versus tax preparers. Obviously, that's going to be a little confusing because you're going to say, hey, I don't really you got two separate listings of penalties. You have to know and rules and all that. Yes, there's a lot to

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Ethics and Responsibilities in Tax Practice

Module: 2 Concepts, 33 Videos

Internal Revenue Code and Tax Return Preparation Regulations Overview

4:17

Introduction to Internal Revenue Code and Tax Return Preparation Regulations

5:20

IRS Tax Forms

5:40

Types of Federal Taxes