Rivera underpaid her income tax by $45,000. The IRS can prove that $40,000 of the underpayment was due to fraud. a. Determine Rivera's civil fraud penalty. $fill in the blank 1 b. Rivera pays the penalty five years after committing the fraudulent act. Compute the present value of Rivera's penalty. Assume her after-tax rate of return on available cash is 9%. The present value factor for 5 years and 9% is 0.6499. $fill in the blank 2

Rivera

a. Rivera's civil fraud penalty is:

$5,000 ($45,000 - $40,000)

b. Present value of Rivera's penalty is:

$3,249.50 ($5,000 * 0.6499)

Explanation:

a) Data and Calculations:

Income tax underpayment = $45,000

Underpayment due to fraud = $40,000

Civil fraud penalty = $5,000 ($45,000 - 40,000)

Rate of return = 9%

Number of years = 5 years

Present value factor = 0.6499

b) The present value of the penalty represents the $5,000 discounted to its present value using the discount factor of 0.6499.  This results into $3,249.50 after 5 years at an interest rate of 9% per annum.

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