Filing, examinations, disputes and a complete return

This final lesson does two things. First, it covers the administrative life of a return: when it is due, what happens if it is late or tax is paid late, how estimated tax works, how the IRS examines returns, how long it has to assess additional tax, how a taxpayer disputes a proposed adjustment, and what penalties apply to errors and evasion. Second, it assembles the Brandts' complete 2026 federal return from the pieces computed in lessons 3 to 11 and uses it to review the course. As throughout, the figures are illustrative and the computation is federal; a real return also includes state tax and many details omitted here.

Filing deadlines and late filing

Form 1040 for 2026 is due on 15 April 2027 (moved to the next business day if it falls on a weekend or holiday). An automatic six-month extension to 15 October is available by filing Form 4868 or making an electronic payment designated as an extension payment, but it extends only the time to file, not the time to pay: tax not paid by 15 April bears interest and may bear a failure-to-pay penalty. US citizens living abroad get an automatic two-month extension to 15 June. Most returns are filed electronically, and preparers who file more than ten returns a year must e-file.

The failure-to-file penalty in section 6651(a)(1) is 5 percent of the unpaid tax for each month or part of a month the return is late, up to 25 percent, with a minimum penalty for returns more than 60 days late. The failure-to-pay penalty is 0.5 percent of the unpaid tax per month, up to 25 percent; when both apply in the same month, the filing penalty is reduced by the payment penalty. Interest on underpayments is charged at the federal short-term rate plus 3 percentage points, compounded daily. A taxpayer owed a refund faces no penalty for filing late but must claim the refund within three years of the due date, or it is lost. The IRS can waive penalties for reasonable cause, and its first-time abatement policy usually removes filing and payment penalties for a taxpayer with a clean record for the previous three years.

Estimated tax

Taxpayers whose income is not fully covered by withholding must pay estimated tax in four installments, due 15 April, 15 June and 15 September of the tax year and 15 January of the following year. Section 6654 imposes an addition to tax, computed like interest, on underpayments unless the tax owing after withholding and credits is less than $1,000 or the payments meet a safe harbor: 90 percent of the current year's tax, or 100 percent of the prior year's tax (110 percent if the prior year's AGI exceeded $150,000, or $75,000 for married filing separately). Withholding is treated as paid evenly through the year regardless of when it was withheld, which makes increasing withholding late in the year a useful way to cure an underpayment. Farmers and fishermen have special rules.

Assessment and reassessment

After a return is filed, the IRS processes it and may later select it for examination. Many adjustments come from automated underreporting notices (CP2000) when income on the return does not match information returns. Examinations may be correspondence examinations by mail, office examinations or field examinations at the taxpayer's place of business. Under section 6501, the IRS generally must assess additional tax within three years after the return was filed (a return filed early is treated as filed on the due date). The period is six years if the taxpayer omitted more than 25 percent of gross income, and unlimited if the return was fraudulent or no return was filed. The taxpayer and the IRS can agree to extend the period on Form 872, which the IRS often requests during an examination. A refund claim must generally be filed within three years after the return was filed or two years after the tax was paid, whichever is later.

Taxpayers should keep records supporting each item on a return for at least as long as the period of limitations remains open, and records of property basis for as long as the property is held plus three years. The IRS has broad summons powers in section 7602 to obtain records from taxpayers and third parties.

Appeals and litigation

After an examination, the IRS issues a report and a 30-day letter proposing adjustments. The taxpayer can agree, or ask for a hearing before the IRS Independent Office of Appeals, which is separate from examinations and can weigh the hazards of litigation in settling. If no agreement is reached, the IRS issues a statutory notice of deficiency, the 90-day letter, and the taxpayer has 90 days (150 days if addressed outside the country) to petition the US Tax Court. The Tax Court is the only forum in which the taxpayer can litigate without first paying the tax; its small tax case procedure, for disputes of $50,000 or less per year, is informal and its decisions cannot be appealed or cited as precedent. Alternatively, the taxpayer can pay the tax, claim a refund and, if refused, sue in a federal district court, where a jury is available, or the Court of Federal Claims. Appeals go to the circuit courts of appeals and, rarely, the Supreme Court. The Taxpayer Advocate Service helps taxpayers with problems they cannot resolve through normal channels.

Penalties for errors and evasion

The accuracy-related penalty in section 6662 is 20 percent of an underpayment attributable to negligence or disregard of rules, a substantial understatement of income tax (one exceeding the greater of 10 percent of the correct tax and $5,000), or certain valuation misstatements; it rises to 40 percent for gross valuation misstatements and undisclosed transactions lacking economic substance. Disclosure of a position with a reasonable basis, or substantial authority for the position, can reduce or avoid the substantial understatement penalty, and reasonable cause and good faith are a defense to most accuracy penalties. The civil fraud penalty in section 6663 is 75 percent of the underpayment attributable to fraud, which the IRS must prove by clear and convincing evidence. Tax evasion is a felony under section 7201. Taxpayers who discover errors can file an amended return on Form 1040-X; those with willful non-compliance, especially involving foreign accounts, may use the IRS voluntary disclosure practice.

Capstone: the Brandts' 2026 Form 1040

The program below assembles the Brandts' 2026 joint return. Each line comes from an earlier lesson: Leah's W-2 wages from lesson 4, Brandt Aerial's Schedule C profit and self-employment tax from lessons 6 and 7, interest, dividends and the suspended rental loss from lesson 8, the capital gain from lesson 9, and the standard deduction and child tax credit from lesson 11. Tomás's W-2 shows $38,000 of wages.

# Capstone: the Brandts' 2026 Form 1040, married filing jointly, simplified (illustrative)
wages = 94_320 + 38_000            # Leah's and Tomas's Forms W-2, box 1
interest, qualified_div = 640, 2_000
sched_c, rental = 12_910, 0        # rental loss of 2,073 is suspended (passive)
net_cap_gain = 12_501.50
se_tax = 1_824.12
total_income = wages + interest + qualified_div + sched_c + rental + net_cap_gain
agi = total_income - se_tax / 2
standard = 32_200
before_qbi = agi - standard
pref = qualified_div + net_cap_gain
qbi = min(0.20 * (sched_c - se_tax / 2), 0.20 * (before_qbi - pref))
taxable = before_qbi - qbi

BR = [(24_800, 0.10), (100_800, 0.12), (211_400, 0.22), (403_550, 0.24),
      (512_450, 0.32), (768_700, 0.35), (float('inf'), 0.37)]
def bracket_tax(x):
    t, lo = 0.0, 0.0
    for hi, r in BR:
        if x > lo:
            t += (min(x, hi) - lo) * r
        lo = hi
    return t
ordinary = taxable - pref
zero_room = max(0, 98_900 - ordinary)              # 0% band ends at 98,900 (MFJ)
at_zero = min(pref, zero_room)
at_15 = min(pref - at_zero, max(0, 613_700 - max(ordinary, 98_900)))
at_20 = pref - at_zero - at_15
income_tax = bracket_tax(ordinary) + 0.15 * at_15 + 0.20 * at_20
ctc = 2_200
total_tax = income_tax - ctc + se_tax
withheld = 11_900 + 2_600

rows = [("Wages", wages), ("Taxable interest", interest), ("Qualified dividends", qualified_div),
        ("Schedule C profit", sched_c), ("Capital gain (Schedule D)", net_cap_gain),
        ("Total income", total_income), ("Less half of SE tax", -se_tax / 2),
        ("Adjusted gross income", agi), ("Less standard deduction", -standard),
        ("Less QBI deduction", -qbi), ("Taxable income", taxable),
        ("Tax: ordinary income at bracket rates", bracket_tax(ordinary)),
        ("Tax: preferential income at 15%", 0.15 * at_15),
        ("Less child tax credit", -ctc), ("Plus self-employment tax", se_tax),
        ("Total tax", total_tax), ("Less federal tax withheld", -withheld),
        ("Amount owed, due 15 April 2027", total_tax - withheld)]
for k, v in rows:
    print(f"{k:<40}{v:>11,.2f}")
print(f"Withholding covers {withheld / total_tax:.1%} of the 2026 tax: the 90% safe harbor is met")

Wages                                    132,320.00
Taxable interest                             640.00
Qualified dividends                        2,000.00
Schedule C profit                         12,910.00
Capital gain (Schedule D)                 12,501.50
Total income                             160,371.50
Less half of SE tax                         -912.06
Adjusted gross income                    159,459.44
Less standard deduction                  -32,200.00
Less QBI deduction                        -2,399.59
Taxable income                           124,859.85
Tax: ordinary income at bracket rates     13,702.84
Tax: preferential income at 15%            2,175.22
Less child tax credit                     -2,200.00
Plus self-employment tax                   1,824.12
Total tax                                 15,502.18
Less federal tax withheld                -14,500.00
Amount owed, due 15 April 2027             1,002.18
Withholding covers 93.5% of the 2026 tax: the 90% safe harbor is met

Total income is $160,371.50 and AGI, after the deductible half of self-employment tax, is $159,459.44. The standard deduction of $32,200 and the QBI deduction of $2,399.59 leave taxable income of $124,859.85. The $14,501.50 of qualified dividends and net capital gain is taxed at 15 percent, and the remaining $110,358.35 at the bracket rates, giving income tax of $15,878.06. The $2,200 child tax credit reduces it and $1,824.12 of self-employment tax is added, for total tax of $15,502.18. Withholding from both W-2s was $14,500, so they owe $1,002.18 by 15 April 2027. Because withholding covered 93.5 percent of the 2026 tax, more than 90 percent, no estimated tax penalty applies even though the balance is over $1,000. The suspended rental loss of $2,073 carries forward on Form 8582.

Reviewing the return and planning ahead

A good preparer does not stop at the bottom line. Reviewing the Brandts' return suggests several points for 2027. Their 2026 AGI exceeded $150,000, so the prior-year safe harbor for 2027 estimated tax requires payments of 110 percent of the 2026 tax; if their withholding stays at $14,500, they should increase it or pay estimated tax to avoid a penalty if Brandt Aerial earns more. Leah could raise her 401(k) deferral, which would save tax at 22 percent. The suspended rental loss will be released when the condominium is sold or if their income falls. Bonus depreciation made 2026 Schedule C profit low, but it also reduced the basis of the drone and computer to zero, so any sale will produce section 1245 recapture. Leah's next sale of shares should identify high-basis lots specifically. And as Brandt Aerial grows, an S corporation election might reduce self-employment tax, a topic for ACCT-352. Each of these is ordinary tax planning that uses provisions as Congress intended.