Question

Matthew filed a tax return for Easter. During the interview conducted by Matthew, Easter stated that she had made a charitable contribution of artwork in the amount of $20,000 during the tax year, when in fact she had not made this charitable contribution. Matthew did not inquire about the existence of a qualified appraisal or complete a Form 8283, Noncash Charitable Contributions. Matthew reported the deduction on the return, signed the return as the paid preparer, and charged $500 for the tax preparation. The IRS audited the taxpayer and disallowed the contribution. What is the penalty Matthew could face for understatement of a taxpayer’s tax liability?
$250
$500
$1,000
$5,000

Answer 1

$500

Explanation: Matthew failed to make reasonable inquiries or obtain required documentation for a large noncash donation and reported an unreasonable deduction. That triggers the preparer understatement penalty (IRC §6694(a)), which is $500 (per return) — the correct choice here.