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2001 and 2002 underpayments are attributable to substantial
understatements of income tax.
Pursuant to section 6662(a), a taxpayer may be liable for a
penalty of 20 percent of the portion of an underpayment of tax
(1) attributable to a substantial understatement of tax, or (2)
due to negligence or disregard of rules or regulations. Sec.
6662(b). The term “understatement” means the excess of the
amount of tax required to be shown on a return over the amount of
tax imposed which is shown on the return, reduced by any rebate
(within the meaning of section 6211(b)(2)). Sec. 6662(d)(2)(A).
Generally, an understatement is a “substantial understatement”
when the understatement exceeds the greater of $5,000 or 10
percent of the amount of tax required to be shown on the return.
Sec. 6662(d)(1)(A). The term “negligence” in section 6662(b)(1)
includes any failure to make a reasonable attempt to comply with
the Internal Revenue Code and any failure to keep adequate books
and records or to substantiate items properly. Sec. 6662(c);
sec. 1.6662-3(b)(1), Income Tax Regs. Negligence has also been
defined as the failure to exercise due care or the failure to do
what a reasonable person would do under the circumstances. See
Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348,
353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947
(1985). The term “disregard” includes any careless, reckless, or
intentional disregard. Sec. 6662(c).
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Last modified: November 10, 2007