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Respondent determined that petitioners are liable for
accuracy-related penalties under section 6662(a) for each of the
years at issue. Section 6662(a) imposes a penalty of 20 percent
of the portion of an underpayment attributable to negligence or
disregard of rules or regulations. Sec. 6662(b)(1).
“Negligence” is defined as any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, and “disregard” is defined as any careless, reckless, or
intentional disregard. Sec. 6662(c). Negligence also includes
any failure by the taxpayer to keep adequate books and records or
to substantiate items properly. Sec. 1.6662-3(b), Income Tax
Regs.
The accuracy-related penalty does not apply if petitioners
had reasonable cause for the underpayment and acted in good faith
with respect to the underpayment. Sec. 6664(c)(1). Whether a
taxpayer acted with reasonable cause and in good faith is
determined on a case-by-case basis, taking into account all
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. The most important factor generally is the extent of
the taxpayer’s effort to assess his proper tax liability. Id.
An honest misunderstanding of fact or law that is reasonable in
light of all the facts and circumstances may indicate reasonable
cause. Id.
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Last modified: May 25, 2011