Clifford, a qualified appraiser of fine art and other collectibles, was advising Sarah when she was determining the amount of the charitable contribution deduction for a gift of a sculpture to a museum. Clifford sanctioned a $900,000 appraisal, even though he knew the market value of the piece was only $300,000. Sarah assured Clifford that she had never been audited by the IRS even though she regularly donated artworks, so the risk of the government questioning his appraisal was negligible.

But Sarah was wrong, and her return was audited. The IRS used its own appraisers to set the value of the sculpture at $400,000. Sarah is in the 33% Federal income tax bracket, while Cliffords fee for preparing the appraisal was $20,000.

a. Compute the penalty the IRS can assess against Clifford. (Don not consider the valuation penalty as to Sarahs return.)

b. What is the penalty if Cliffords appraisal fee was $7,500, not $20,000?

c. Construct an Excel formula that would generate the correct answer for parts (a) and (b).