Blair underpaid her taxes by $381,000. A portion of the underpayment was shown t

Question

Blair underpaid her taxes by $381,000. A portion of the underpayment was shown to be attributable to Blair's negligence ($152,400). A court found that the rest of the deficiency constituted civil fraud ($228,600).

a. Compute the total fraud and negligence penalties. $.

b. Blair pays the penalties four years after committing the improper acts. Her after-tax rate of return on available cash is 7%.The present value factor for four years at 7% is 0.7629. What is the present value of Blair’s penalty obligations?

Round your answer to the nearest dollar.

The present value of Blair’s penalty obligations is $.

Explanation / Answer

a)If understatement of taxes is due to negligence ,then no penalty is payable if sufficient reason is shown.

In case of fraud ,penalty is 75% of underpayment of tax

          = .75 * 228600

             = $ 171450

total fraud and negligence penalties =$ 171450

b)present value of Blair’s penalty obligations = .7629*171450 = $ 130799.21 [rounded to 130799]

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