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An understatement of income tax is “substantial” if it
exceeds the greater of 10 percent of the tax required to be shown
on the return, or $5,000. Sec. 6662(d)(1)(A). An
“understatement” is defined as the excess of the tax required to
be shown on the return over the tax actually shown on the return.
Sec. 6662(d)(2)(A).
Whether the accuracy-related penalty is applied because of
negligence or disregard of rules or regulations, or a substantial
understatement of tax, section 6664 provides an exception to
imposition of the accuracy-related penalty if the taxpayer
establishes that there was reasonable cause for the
understatement 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. Generally,
the most important factor is the extent of the taxpayer’s effort
to assess the proper tax liability for such year. Id.
By virtue of section 7491(c), the Commissioner has the
burden of production with respect to a taxpayer’s liability for
any penalty. To meet this burden, the Commissioner must produce
sufficient evidence indicating that it is appropriate to impose
the relevant penalty. Higbee v. Commissioner, 116 T.C. 438, 446
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Last modified: May 25, 2011