Substantial Misstatements and Franchise Tax Board Penalties


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The penalties for mistakes and misstatements in tax documents are costly and may lead to severe consequences for those involved. However, when the misstatements are substantial, they may lead to additional fees or even criminal charges depending on the specific circumstances.

When the Franchise Tax Board contains accuracy issues and substantial understatements or misstatements, various penalties and consequences related to the penalties affect the owner of a franchise as well as those surrounding him or her. Income and assets of the franchise require disclosure on tax forms to include payments for sales and income tax when applicable. When a corporation files tax paperwork with these errors, the owner may find his or her required penalties in payments equal to or lesser than $5 million or ten percent of the required tax amount. This is much greater than a single individual paying his or her tax which may include no more than $5000.

What are Substantial Misstatements?

Valuation misstatements about income, sales and similar items in one year of the business transactions could lead to underpayment in taxes. When these are substantially greater than a simple mistake, this could lead the Internal Revenue Service to believe it was intentional to avoid large tax payments to the government for the year. The valuation report is necessary to help determine and calculate how much show transfer through payment to the government. This is one significant reason to have a tax professional on hand. He or she would prepare the information and ensure that the appropriate amount of taxes is taken out for payment at the new tax season.

Valuation of income and revenue in a franchise is important. Without properly assessing the true valuation of these numbers over the course of the year, substantial misstatements are a possible inevitability. The professional tasked with these calculations may need another to check the work so that errors are not on the paperwork filed with the IRS. It is possible that one year is not part of the group of statements about the next or previous year. However, the IRS may charge the franchise with violations for a single year and penalties may require payment for any misstatements.

Substantial Misstatement Specifics

The IRS Code for specific states may define a misstatement as much as 150 percent or a larger amount of the correct numbers for income in the franchise. This is the value or adjusted valuation of the asset, and this would cover revenue in the company. If the misstatements involve single or multiple transactions and not the overall income, the information defines these as data on returns at 200 or greater percent or less than 50 percent of the true value that passed through the franchise. The net income for the company may exceed $5 million or an adjusted ten percent of the receipts analyzed would incur a violation.

Depending on the state where the franchise exists, the penalty incurred for violations of tax return statements may be 20 or more percent of the underpayment received for the actual income the franchise has for the year. For gross valuation misstatement errors, this amount could increase to 40 percent or more. It is critical that the franchise does not engage in these substantial misstatements. The same income and product sales are part of these statements, but the numbers increase from 200 percent to 400 and decrease from 50 percent to 25. However, there are no penalties for underpayments of less than $5000 for corporations.

Gross Valuation Impact

While the negative impact of penalties and possible criminal charges may occur, there are other potential conclusions to the matter. It is possible to receive an abatement of penalties. This may cause a reduction in penalties or a complete wipe of the concern from the records. It is possible to prevent these incidents through keeping meticulous books and hiring a professional to provide valuation and tax return forms to the appropriate authorities. Some franchises require extensive records, and when kept properly, the owner may avoid penalties for gross and substantial misstatement violations. However, a tax lawyer may need to become part of these proceedings if there are few or not options left.

Legal Assistance in Substantial Misstatements

Legal services retained for franchise tax misstatements may provide the owner with options not usually available. However, communication is key to these relationships with the IRS and authorities in these matters. Hiring a lawyer may ensure the correct person or group contact occurs to prevent possible disaster.


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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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