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Accuracy-Related Penalty
In the notice of deficiency, respondent determined that
petitioners were liable for the accuracy-related penalty under
section 6662(a) for underpayment of tax.
Section 6662(a) imposes a 20-percent penalty with respect
“to any portion of an underpayment of tax required to be shown on
a return”. This penalty applies to underpayments attributable to
any substantial understatement of income tax. Sec. 6662(a),
(b)(2).
An “understatement” of income tax 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). An
understatement 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).
Section 6664 provides a defense to the accuracy-related
penalty if a taxpayer establishes that there was reasonable cause
for any portion of the underpayment and that he or she acted in
good faith with respect to that portion. Sec. 6664(c)(1); sec.
1.6664-4(a)(1), Income Tax Regs. Although not defined in the
Code, “reasonable cause” is viewed in the regulations as the
exercise of ordinary business care and prudence. See sec.
301.6651-1(c)(1), Proced. & Admin. Regs. Whether a taxpayer
acted with reasonable cause and in good faith is made on a case-
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Last modified: March 27, 2008