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“substantial understatement” as an understatement of income tax
for the taxable year that exceeds the greater of 10 percent of
the tax required to be shown on the return or $5,000.
Section 6664(c)(1) provides an exception to the accuracy-
related penalty as it applies to any portion of an underpayment
where the taxpayer shows that there was a reasonable cause for
such portion, and that the taxpayer acted in good faith with
respect to such portion.
Regulations interpreting section 6664(c)(1) state:
The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-
by-case basis, taking into account all pertinent facts
and circumstances. * * * Generally, the most important
factor is the extent of the taxpayer’s effort to assess
the taxpayer’s proper tax liability. Circumstances
that may indicate reasonable cause and good faith
include an honest misunderstanding of fact or law that
is reasonable in light of all the facts and
circumstances, including the experience, knowledge and
education of the taxpayer. * * * [Sec. 1.6664-4(b)(1),
Income Tax Regs.]
In court proceedings that arise in connection with
examinations commencing after July 22, 1998, the Commissioner
bears the burden of producing sufficient evidence to indicate
that it is appropriate to impose any penalty provided for in the
Internal Revenue Code. Sec. 7491(c); Higbee v. Commissioner, 116
T.C. 438, 446-447 (2001). Once the Commissioner’s burden is met,
the taxpayer bears the burden of establishing that the section
6664(c)(1) reasonable cause exception is applicable. Higbee v.
Commissioner, 116 T.C. at 447.
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Last modified: May 25, 2011