- 13 -
There is a “substantial understatement” of an individual’s
income tax for any taxable year where the amount of the
understatement exceeds the greater of (1) 10 percent of the tax
required to be shown on the return for the taxable year or (2)
$5,000. Sec. 6662(d)(1)(A)(i) and (ii). However, the amount of
the understatement is reduced to the extent attributable to an
item (1) for which there is or was substantial authority for the
taxpayer’s treatment thereof, or (2) with respect to which the
relevant facts were adequately disclosed on the taxpayer’s return
or an attached statement and there is a reasonable basis for the
taxpayer’s treatment of the item. See sec. 6662(d)(2)(B).
There is an exception to the section 6662(a) penalty when a
taxpayer can demonstrate (1) reasonable cause for the
underpayment and (2) that the taxpayer acted in good faith with
respect to the underpayment. Sec. 6664(c)(1). Regulations
promulgated under section 6664(c) further provide that the
determination of reasonable cause and good faith “is made on a
case-by-case basis, taking into account all pertinent facts and
circumstances.” Sec. 1.6664-4(b)(1), Income Tax Regs.
Reliance upon the advice of a tax professional may, but does
not necessarily, establish reasonable cause and good faith for
the purpose of avoiding a section 6662(a) penalty. See United
States v. Boyle, 469 U.S. 241, 251 (1985) (“Reliance by a lay
person on a lawyer is of course common; but that reliance cannot
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: March 27, 2008