1. Upon audit of Mr. Tom Staton's 2018 Form 1040, the revenue agent determined that he understated his tax liability by $4,725. Required:

a. Compute Mr. Staton's penalty for substantial understatement if his correct tax liability for 2018 was $42,900.

b. Compute Mr. Staton's penalty for substantial understatement if his correct tax liability for 2018 was $71,800.

2. Upon audit of Mr. Tom Staton's 2018 Form 1040, the revenue agent determined that he understated his tax liability by $4,300. Required:

a. Compute Mr. Staton's penalty for substantial understatement if his correct tax liability for 2018 was $40,800.

b. Compute Mr. Staton's penalty for substantial understatement if his correct tax liability for 2018 was $69,700.