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Section 6662(a) provides for an accuracy-related penalty
equal to 20 percent of any portion of an underpayment of tax
required to be shown on the return that is attributable to the
taxpayer's negligence or disregard of rules or regulations. Sec.
6662(a) and (b)(1). Negligence consists of any failure to make a
reasonable attempt to comply with the provisions of the Internal
Revenue Code, and disregard consists of any careless, reckless,
or intentional disregard. Sec. 6662(c). The courts have refined
the Code definition of negligence as a lack of due care or
failure to do what a reasonable and prudent person would do under
similar circumstances. Allen v. Commissioner, 925 F.2d 348, 353
(9th Cir. 1991), affg. 92 T.C. 1 (1989). Section 1.6662-3(b)(1),
Income Tax Regs., provides that "Negligence is strongly indicated
where * * * a taxpayer fails to make a reasonable attempt to
ascertain the correctness of a deduction * * * on a return which
would seem to a reasonable and prudent person to be 'too good to
be true' under the circumstances".
An exception applies when the taxpayer demonstrates (1)
there was reasonable cause for the underpayment, and (2) the
taxpayer acted in good faith with respect to the underpayment.
Sec. 6664(c). Whether the taxpayer acted with reasonable cause
and in good faith is determined by the relevant facts and
circumstances. The most important factor is the extent of the
taxpayer's effort to assess the proper tax liability.
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Last modified: May 25, 2011