Question

Lysander’s client told him that he had additional income for a side job but does not want to report the income since he is paid under the table and he did not receive a Form 1099. Lysander filed the return and chose not to report the income since he didn’t have any documentation or proof of the income. As a result, the client paid less tax. Lysander charged $500 for the tax preparation. The IRS audited the client; they can assess what penalty to Lysander for understatement due to willful or reckless conduct as a paid preparer?
$375
$500
$1,000
$5,000

Answer 1

$5,000.

Under IRC §6694(b) the preparer penalty for willful or reckless conduct is the greater of $5,000 or 75% of the income derived by the preparer from preparing the return. 75% of Lysander’s $500 fee is $375, so the statutory minimum $5,000 applies.