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:: Accuracy - Related Penalty
In General
IRC § 6662 imposes an
accuracy-related penalty on any portion of
an underpayment attributable to one or more
of the following:
(1) negligence or disregard of the rules or
regulations;
(2) any substantial understatement of
income tax;
(3) any substantial valuation misstatement
under Chapter 1 of the Code;
(4) any substantial overstatement of
pension liabilities; and
(5) any substantial estate or gift tax
valuation understatement.
See
Exhibit 5 for a summary of IRC § 6662
and the related reasonable cause and good
faith exception under IRC § 6664.
IRC § 6662 - Accuracy-Related
Penalty
This ATG focuses primarily on the
Negligence or Disregard of Rules or
Regulations, Substantial Understatement and
Substantial Valuation Misstatement
components of the accuracy-related penalty
that are most likely to apply in
examinations relating to tax shelters. The
following table provides references to the
IRM Penalty Handbook for the other
components of the accuracy-related penalty
in the event they are applicable to a
particular case under examination:
Penalty Component IRM Reference Page #
Overstatement of Pension
Liabilities 20.1.5.10 27
Estate or Gift Tax Valuation
Understatement 20.1.5.11 29
The accuracy-related penalty applies only if
a return is filed, except that the penalty
does not apply in the case of a return
prepared by the Secretary under IRC §
6020(b). IRC § 6664(b); see also Treas.
Reg. § 1.6662-2(a). The taxpayer also may
not be subject to the accuracy-related
penalty if the taxpayer had reasonable cause
and acted in good faith under IRC §
6664(c). The reasonable cause and good
faith exception under IRC § 6664(c) applies
to all components of the accuracy-related
penalty, with special rules for a
substantial understatement attributable to a
tax shelter item of a corporation.
Penalty Amount
The amount of the accuracy-related penalty
is 20 percent of the portion of the
underpayment resulting from the misconduct.
The penalty rate is increased to 40 percent
in certain circumstances involving gross
valuation misstatements.
Stacking of the accuracy-related penalties
is not permitted. The maximum amount of the
accuracy-related penalty imposed on a
portion of an underpayment of tax is 20
percent (or 40 percent in the case of a
gross valuation misstatement) of that
portion of the underpayment, even if that
portion of the underpayment is attributable
to more than one type of misconduct
proscribed under IRC § 6662. The Service
may, and should, however, assert the penalty
for the underpayment based on each
prohibited behavior, in the alternative,
that applies. For example, if a portion of
an underpayment is attributable to both
negligence and a substantial understatement
of income tax, the Service may rely on both
theories (asserting the second theory in the
alternative) in imposing the penalty,
although the maximum accuracy-related
penalty that may be imposed is 20 percent of
that portion of the underpayment. Treas.
Reg. § 1.6662-2(c).
The accuracy-related penalty also does not
apply to any portion of an underpayment on
which a penalty is imposed for fraud under
IRC § 6663.
Definition of Underpayment
Underpayment means the amount by
which any tax imposed exceeds the excess of
(1) the sum of (A) the amount shown as the
tax by the taxpayer on his return, plus (B)
amounts not so shown previously assessed (or
collected without assessment), over (2) the
amount of rebates made. IRC § 6664(a).
Treas. Reg. § 1.6664-2(c)(2) provides that
the amount shown as tax on an income tax
return includes amounts shown as additional
tax on a “qualified amended return” (unless
the additional amount shown was omitted on
the original return because of a fraudulent
position on the original return). Treas.
Reg. § 1.6664-2(c)(3) defines “qualified
amended return” as an amended return filed
after the due date of the return for the tax
year (determined without regard to an
extension of time to file) and before the
time the taxpayer is first contacted by the
Service concerning an examination of the
original return, and, in the case of a tax
shelter item, before the time a promoter
described in IRC § 6700(a) is contacted by
the Service concerning an examination of the
shelter activity.
On April 30, 2004, the Service announced
additional period of time after which a
taxpayer is no longer permitted to file a
qualified amended return. See Notice
2004-38, 2004-21 I.R.B. 1. Under Notice
2004-38 and in addition to the current
requirements, a taxpayer must file a
qualified amended return before the earliest
of: (1) the date on which a third party is
served a John Doe summons described in IRC §
7609(f) with respect to the return
reflecting the transactions or tax items
that are the subject of the summons or (2)
the date of contact (date on which any
person required to register a tax shelter
under IRC § 6111(a) is first contacted by
the Service for examination of an activity
described in IRC § 6707(a) or the date of
request (date on which any person described
in IRC § 6112(a) receives a request from the
Service for information required to be
included on a list under IRC § 6112.
Treasury and the Service will issue
temporary regulations that will modify the
definition of qualified amended return as
reflected in Notice 2004-34. See Treas.
Reg. § 1.6664-2(c) for further discussion of
qualified amended returns.
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