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Student Question of the Week: Income Tax

Student Question:

Student Question from: John C.

Course:  Income Tax

Question:   I had a quick question about taxpayer return penalties.  In the Review Exercise below, I’m getting an answer of $780, but you all are showing an answer of $810.  Why isn’t my math adding up?  I’m counting 7 months for April to October.  

Here is my calculation:  5 x 4.5% + 7 *0.5 % = 26% x 3000 = $780

Jerry’s taxes were due April 15th. He filed his return in October of the same year, and paid his $3,000 two months later. Would Jerry be subject to a penalty? How much?


Instructor Response:

Hi John! I’m glad you asked this question because there is a good lesson about the CFP Board exam within. So you correctly limited the failure to file penalty to 5 months (most people forget that), but then you only applied 7 months for failure to pay. The question states he filed in October but paid 2 months later. So it was 9 months late, not 7. So the calculation is (5 x 4.5% x 3000) + (9 x 0.5% x 3000) = $810.
This is a great lesson for the Board exam because they will often times try to “sneak” pertinent information in. In this question, they make a point of listing the month of October for when Terry filed, but they casually mention he pays two months later. Always read carefully!