May 2010

The Accuracy-Related Penalty (Part II)

From The Tax Advisor.

• In general, Sec. 6664 provides that the Sec. 6662 accuracy-related penalty will not apply to any portion of an underpayment for which the taxpayer had a reasonable cause and acted in good faith.
• 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 pertinent facts and circumstances. Whether the taxpayer had reasonable cause is an objective determination, and whether the taxpayer acted in good faith is a subjective determination.
• Depending on the specific facts and circumstances, reliance on an informational return or on professional advice may demonstrate reasonable cause and good faith by the taxpayer.
• Special rules apply to underpayments related to reportable transactions, substantial underpayments attributable to corporate tax shelter items, and valuation misstatements of charitable deduction property.

Sec. 6662 imposes an accuracy-related penalty equal to 20% of any underpayment of federal tax resulting from certain taxpayer conduct (e.g., negligence, disregard of rules or regulations, substantial understatement of income, and certain over- and undervaluations).1 This is part II of a two-part article addressing the Sec. 6662 accuracy-related penalty and the defense available to taxpayers. Part I, in the April issue, provided an overview of the various bases upon which the IRS can impose a Sec. 6662 penalty. Part II discusses the Sec. 6664 reasonable cause and good-faith defense to the Sec. 6662 penalty. Both parts describe key considerations for practitioners helping clients contest an asserted Sec. 6662 penalty.

Read full article.