Or. Admin. R. 150-314-0205 - Substantial Understatement Penalty (SUP)
Effective year - Corporation - Individuals
2017 - $3,500 - $2,400
2018 - $3,550 - $2,400
2019 - $3,650 - $2,500
2020 - $3,700 - $2,550
2021 - $3,750 - $2,550
2022 - $3,850 - $2,650
Example 1: A 2017 partnership return is adjusted for a $50,000 increase in unreported income. The partnership is owned by Renton, Mark, and Paul. The partnership adjustment results in an increase in net tax of $2,700 on Renton's individual return, $1,350 on Mark's individual return, and $900 on Paul's individual return. The SUP penalty is only assessed on Renton's tax due because only his return had an understatement of net tax exceeding $2,400 (the understatement threshold for the tax year). The adjustment to Mark and Paul's individual returns will not include the SUP penalty, although all three may be subject to other penalties as provided by law.
Example 2: Bobbie is a full-year resident who reported a federal adjusted gross income of $25,000 on his 2017 return, and claimed a $3,200 credit for taxes paid to California. Bobbie reported a net tax of zero on his personal income tax return because the $3,200 credit was larger than the $1,394 tax calculated on his taxable income. Upon audit, it was determined Bobbie did not qualify for the credit for taxes paid to California, and his return was adjusted to reflect a reduction of nonrefundable credits of $3,200. Bobby's net tax was understated by $1,394, the amount of net tax that would have been reported, had he not claimed the credit. Bobbie is not assessed an SUP penalty because his understatement was not more than $2,400 (the understatement threshold for the tax year).
Example 3: Tyler and Leah are full-year residents who filed a joint return reporting a federal adjusted gross income of $38,000 on their 2015 return. Tyler and Leah claimed a $200 child and dependent care credit, a $4,800 working family childcare credit, and a $1,200 earned income credit. Tyler and Leah reported tax before credits of $1,514 and a zero net tax, because their refundable credits were more than the tax calculated on their taxable income. Upon audit it was determined Tyler and Leah had $25,000 unreported Schedule C income and they no longer qualified for the child and dependent care credit, the working family child care credit, or the earned income credit. After the audit adjustment, Tyler and Leah's tax before credits is $3,773 and their net tax is $2,818. Tyler and Leah's net tax understatement is $2,818 because the net tax reported on their return was zero. Tyler and Leah will be assessed an understatement of net tax penalty of $564 ($2,818 x 20%) because their understatement exceeded the understatement threshold for the tax year.
Example 4: Meghan moved from Idaho to Oregon on May 1, 2017. Meghan filed a 2017 Oregon Form 40P on April 15th of the following year. Meghan reported $86,000 in wages and $55,000 of Schedule E rental income in the federal column of her return, and $45,000 of wages and no Schedule E rental income in the Oregon column. Meghan also claimed $16,500 in moving expenses in both the federal and Oregon columns. Meghan's income after subtractions is $124,500 in the federal column and $28,500 in the Oregon column. Meghan's Oregon percentage is 23% (28,500/124,500). After deductions, Meghan reported $94,150 in taxable income and $1,950 tax before credits. Meghan claimed $3,500 in withholding payments, a $191 exemption credit, and an $800 credit for taxes paid to Idaho on mutually taxed income. Meghan's net tax as reported is $959 ($1,950 - $191 - $800). Upon audit, the department determined $32,000 of Meghan's Schedule E income should have been reported in the Oregon column. Meghan's return was adjusted to report a total of $60,500 in the Oregon column, and her Oregon percentage was revised to 49%. Meghan's taxable income did not change because the adjustment only affected the Oregon column. However, her tax before credits was increased to $4,152 because of the increase to the Oregon percentage. Meghan's net tax as determined by the department is $3,161 ($4,152 - $191 - $800). Meghan's withholding payment is not regarded in calculating net tax for the purpose of the substantial understatement penalty. Meghan did not have substantial authority for excluding the Schedule E income from the Oregon column and there was not adequate disclosure and a reasonable basis for the position. Meghan's understatement of net tax is $2,202. Meghan is not assessed an SUP as her understatement of net tax is less than the understatement threshold for the tax year.
Publications: Contact the Oregon Department of Revenue for information about how to obtain a copy of the publication referred to or incorporated by reference in this rule pursuant to ORS 183.360(2) and ORS 183.355(1)(b).
Statutory/Other Authority: ORS 305.100
Statutes/Other Implemented: ORS 314.402
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