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Sunday, February 05, 2017

30% Penalty Is Not an Excessive Fine

So says the Tax Court in the recent decision involving the 30% penalty imposed under Code §6662A(c). The penalty can be imposed if a taxpayer fails to adequately disclose a reportable transaction giving rise to an understatement of tax. The penalty is 30% of the tax understatement. When the penalty applies, there are no defenses allowed.

The Eighth Amendment to the United States Constitution provides "excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." To avoid a problem under this clause, the amount of the fine must bear some relationship to the gravity of the offense that it is designed to punish.

Since the penalty applies only to listed transactions (essentially, transactions deem to be abusive), and to reportable transactions with a significant purpose of avoiding or evading federal income tax, the court found measurable harm to the government from violations and that the penalty is proportional to the harm caused.

Thompson, (2017) 148 TC No. 3

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