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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3375
Experience:  Over 20 Years experience
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In 2010 I failed to report a dividend from a foreign corporation

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In 2010 I failed to report a dividend from a foreign corporation of $6,000. This is the only dividend I received from that company. I did not receive a form 1099. 20% tax was withheld on the dividend so I received $4,800 net. I figured it didn't matter that I didn't report the dividend income, as the US tax on the dividend would have been offset by the foreign tax credit. If I report it now would I be charged with a penalty for not reporting the income? and if so how much?

R. Klein, EA :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

R. Klein, EA :

The Tax Year 2010 is still an "open" year for tax processing and refunds, at least until April 15, 2014.

R. Klein, EA :

You have a legal responsibility to report all income, regardless of whether you receive a 1099 or not. That's the legal position.

R. Klein, EA :

The reality is that you MAY be due a refund or you MAY owe more tax. The only way to determine this is by preparing an amended return.

R. Klein, EA :

Amended returns are done on Form 1040X. If you do not have software that you used to prepare the original return, you may need to either obtain software, or manually prepare a second tax return and then translate the "differences" between the first and second return to the 1040-X form.

R. Klein, EA :

If the foreign corporation payment a "qualified dividend", then a tax rate of 15% maximum applies. Yes, you have a foreign tax credit, but until you work it through the return, the amount of the foreign tax credit cannot be determined here.

R. Klein, EA :

If the corporation paid a non-qualified dividend, then your regular tax rate applies to that income.

R. Klein, EA :

SO, how much tax is owed on that $6K depends on your tax bracket and whether it is a "qualified" dividend or not. If you are in the 15% or lower tax bracket for your regular income, the $6K might apply to the 0% tax bracket and you may be owed a $1200 refund due to the foreign tax credit.

R. Klein, EA :

Any refund MUST be claimed by April 15, or it is permanently lost, so this may be something that actually puts money in your pocket that you are missing!

Customer:

Thank you: but my question was, would there be a penalty for not reporting income and if so how much?

R. Klein, EA :

Penalties are assessed based on two factors: 1) How delinquent is the payment of tax and 2) How much tax was not paid timely.

R. Klein, EA :

If you are due a refund, then the penalty is based on zero amount due--therefore zero penalty

R. Klein, EA :

If you OWE tax, your penalty is computed as 6% annually for late payment, plus interest, which currently averages about 4-5% since 2011.

R. Klein, EA :

The maximum late payment penalty is 25% of the tax due (which would be after 50 months late). Interest never stops until the tax is paid.

Customer:

Thanks. If I understood you correctly, I need to prepare a 1040X to include the foreign dividend, and after working through the dividend and tax credit, if there is no additional tax to pay then there is no penalty.

R. Klein, EA :

If you owe nothing after working the 1040X, then no penalty is assessed. But you have a deadline to claim a refund.. There is no time limit if you owe the IRS. They will let the interest grow until you pay!

Customer:

Thanks.

R. Klein, EA and 3 other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Thanks. I'm back. I just heard about accuracy penalties. So if I failed to report dividend income in 2010, and working through the return with foreign tax credits, I conclude that I had to pay an extra $100 in tax. So what?


 


Tax =- $100


Accuracy Penalty = $20


Interest = 5% x 3 1/2 years x $100 = $17.5 (approx.)


Late Payment Tax 25% x $100 = $25


 


Total Tax = $100


Interest and Penalties = $62.5.


 


Is this the kind of assessment I could get if I found I owed $100 in tax.