It’s safe to say that almost every Georgia family makes efforts to ensure that they do not unnecessarily overpay their taxes. For some these efforts are limited to simply double-check their return and doing the math again, while others engage in a complex tax planning process to find legal ways to manage income so that it will not be subject to a high income tax rate.

When a taxpayer does more complex tax planning they can run into a tax controversy with the IRS, particularly when the method that the taxpayer used to minimize their income tax bill pushed the limits of the law. One such case recently made it all the way to the Supreme Court, where justices unanimously ruled for maximum penalties for a taxpayer who used a specific type of shelter to avoid taxes on a large profit.

The case involved an important distinction between individuals who intentionally misstate facts to the IRS in order to avoid taxes and those who underpay as a result of an incorrect legal analysis. This case falls in to the latter category, and lower courts were divided as to whether these cases should be subject to the same maximum penalties as the factual misstatement cases. The Supreme Court said that the maximum penalties do apply here, so the estimated $45 million that was apparently shielded from income taxes will now be subject to a 40 percent penalty.

This case may seem unusual or extreme to some readers, but those familiar with the issue say that there are many pending similar cases already in the courts. In addition, it provides a good example of the variety of repercussions that the IRS may impose on taxpayers who underpay their taxes.

Source: Forbes, “Supreme Court side with IRS in Tax Shelter Penalty Case,” Ashlea Ebeling, Dec. 3, 2013.