Bennie underpaid his taxes by 250000 A portion of the underp

Bennie underpaid his taxes by $250,000. A portion of the underpayment was shown to be attributable to Bennie’s negligence ($100,000). A court found that the rest of the deficiency constituted civil fraud ($150,000).

a. Compute the total fraud and negligence penalties incurred.

b. Bennie pays the penalties four years after committing the improper acts. His after-tax rate of return on available cash is 7%. What is the present value of Bennie’s penalty obligations?

Solution

a) If understatement of taxes is due to negligence ,then Penalty is 20% of Underpaymen tof of Tax Attributable to Negligence. Hence Penaly will be ( $100000*20%)=$20000 In case of fraud ,penalty is 75% of underpayment of tax attributable to Fraud ($100000*0.75)=$75000 total fraud and negligence penalties =$95000 b)present value of Blair’s penalty obligations = .7629*95000 = $72475