Or. Admin. R. 150-314-0205

Current through Register Vol. 63, No. 6, June 1, 2024

Section 150-314-0205 - Substantial Understatement Penalty (SUP)

(1) The department will assess a penalty if a substantial understatement of net tax exists for any taxable year. The penalty is equal to 20 percent of the amount of any underpayment of net tax attributable to the understatement. A substantial understatement exists only if incurred on the return of the individual, corporation, or reporting entity required to file a return and pay tax.

(2) Net Tax. In determining if a substantial understatement of net tax exists, net tax equals the total tax as calculated in accordance with the applicable provisions of ORS chapters 314, 315, 316, 317, and 318, reduced by nonrefundable and refundable credits.

(3) Substantial Understatement of Net Tax. An understatement of net tax is substantial if the understatement exceeds $3,850 for corporations (other than S corporations, as defined in section 1361 of the Internal Revenue Code, or a personal holding company, as defined in section 542 of the Internal Revenue Code), or exceeds $2,650 for individuals and all other taxable entities.

(4) Penalty. The substantial understatement penalty is equal to 20 percent of the amount of the understatement of net tax.

(a) The total understatement of net tax is the amount of net tax due as determined by the department, minus:

(A) Net tax as reported on the return by the taxpayer for the taxable year,

(B) The tax attributable to any item for which there is or was substantial authority, and

(C) The tax attributable to any item for which the relevant facts affecting the item's tax treatment are adequately disclosed on the return or in a statement attached to the return, and there is a reasonable basis for the tax treatment of the item by the taxpayer.

(b) Net tax as reported on the return is the amount of net tax reported by the taxpayer and determined before the taxpayer was first notified by the department concerning their tax liability. If the return shows no net income tax, the amount of net tax shown on the return is considered to be zero. In all cases, net tax as reported is computed without regard to:

(A) Withholdings;

(B) Estimated tax paid by the taxpayer; or

(C) The state surplus refund pursuant to ORS 291.349.

(5) The department will not impose a penalty under ORS 314.402 unless a return has been filed.

(6) The following table shows threshold amounts used by the department to compute the substantial understatement penalty.

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.

Or. Admin. R. 150-314-0205

RD 11-1988, f. 12-19-88, cert. ef. 12-31-88; REV 19-2008, f. 12-26-08, cert. ef. 1-1-09; REV 16-2010, f. 12-17-10, cert. ef. 1-1-11; Runumbered from 150-314.402(1) by REV 9-2015, f. 12-23-15, cert. ef. 1-1-16; Renumbered from 150-314.402-(A), REV 31-2016, f. 8-12-16, cert. ef. 9/1/2016; REV 9-2019, amend filed 12/11/2019, effective 1/1/2020; REV 37-2020, amend filed 12/23/2020, effective 1/1/2021; REV 27-2021, amend filed 12/27/2021, effective 1/1/2022

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