The Eighth Circuit Court of Appeals recently hit Wells Fargo with penalties for negligence related to tax matters. In the case, the government claims the bank wrongly claimed foreign tax credits. As a result, the court fined the bank a negligence penalty for claiming the credits.
How much is the penalty?
The Internal Revenue Code states taxpayers are liable for a 20% penalty for underpayment of taxes as a result of negligence. As a result, the tax will likely be 20% of the unpaid tax obligation. This will mean the bank will get a bill for both the unpaid taxes as well as an additional 20% penalty.
What should taxpayers learn from this case?
The case provides some important lessons, including:
- The IRS is watching. The Internal Revenue Service (IRS) will review tax filings and often takes a close look at tax deductions and credits. Taxpayers are wise to keep documents to support these claims in the event of an audit.
- Penalties can be harsh. In this case, the penalty is a percentage of the missed tax. These penalties can quickly add up to a large fee in addition to the missed tax. It is also important to note this case focused on negligence. If the court had deemed the violation willful, additional penalties could apply.
- A potential move towards concrete evidence. In the past, these arguments were fought with a reasonable cause defense. This case questioned whether the reasonable cause defense was subjective and could take the taxpayer’s frame of mind into account or objective and required concrete evidence. In the end, the court decided evidence was required and ruled in favor of the government.
These findings may make it even more important for taxpayers who are fighting an audit to seek legal counsel. An attorney can take this and other holdings into consideration to tailor a defense strategy to your situation, better ensuring a favorable outcome.