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A substantial understatement of income tax is an
understatement which exceeds the greater of (1) 10 percent of the
tax required to be shown on the return for the taxable year, or
(2) $5,000. Sec. 6662(d)(1)(A). The understatement shall be
reduced by that portion of the understatement attributable to the
tax treatment of any item if (1) there is or was substantial
authority for such treatment, or (2) the relevant facts affecting
the item's tax treatment were adequately disclosed with the
return and there is a reasonable basis for the tax treatment.
Sec. 6662(d)(2)(B).
The accuracy-related penalty will not be imposed with
respect to any portion of an underpayment if it is shown that
there was a reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion. Sec.
6664(c). The determination of whether a taxpayer acted with
reasonable cause and in good faith depends upon the facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
important factor is the extent of the taxpayer's effort to assess
the taxpayer's proper tax liability. Id.
Petitioner argues that it was not his intention to
understate his income or avoid paying taxes. He admits that he
gave a higher priority to the financial problems surrounding the
construction of his house than to filing his returns and that he
is responsible for the late filing of the returns and for payment
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Last modified: May 25, 2011