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Section 6662(a) imposes a penalty equal to 20-percent of any
underpayment of tax that is due to a substantial understatement
of income tax. See sec. 6662(a) and (b)(2). An individual
substantially understates his or her income tax when the reported
tax is understated by the greater of 10-percent of the tax
required to be shown on the return or $5,000. Sec.
6662(d)(1)(A).
The accuracy-related penalty does not apply to any portion
of an underpayment, however, if it is shown that there was
reasonable cause for the taxpayer’s position and that the
taxpayer acted in good faith with respect to that portion. Sec.
6664(c)(1); sec. 1.6664-4(b), Income Tax Regs. 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
the pertinent 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 his proper tax liability for such
year. Id. Circumstances that may indicate reasonable cause and
good faith include an honest misunderstanding of fact or law that
is reasonable in light of the experience, knowledge, and
education of the taxpayer. Sec. 1.6664-4(b), Income Tax Regs.;
see Higbee v. Commissioner, 116 T.C. 438, 449 (2001) (citing
Remy v. Commissioner, T.C. Memo. 1997-72).
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Last modified: May 25, 2011