Suppose you forget to report a W-2, 1099-MISC, 1099-R, etc that has
federal tax withheld. The IRS imposes the IRC 6662 penalty.
BEGIN QUOTE
(a) Imposition of penalty
If this section applies to any portion of an underpayment of tax
required to be shown on a return, there shall be added to the tax an
amount equal to 20 percent of the portion of the underpayment to which
this section applies.
END QUOTE
>From what I saw on a friend, it looks like the IRS is imposing a
penalty 20% of the increase in tax, but they didn't consider the
federal tax withheld, or the itemized deduction from state tax
withheld. In other words, the income of the missing form results in
an increase of the tax of say $10,000 (because income is higher so tax
is naturally higher, but credits etc are phased out more too because
of increased AGI). It looks like the penalty is then $2,000. However
the form also had federal and state tax withheld. In fact, if 10k
federal were withheld then I think the penalty should be 20% of $0 or
$0 -- and after you consider deduction for state taxes paid the
federal tax is lowered further.
So who's right?
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