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In an era of budget deficits, IRS has increased the number and amount of accuracy-related penalties, especially for individuals.,,
In 2005, 58,366 accuracy-related penalties were assessed on individuals for a total of $325 million in penalties. By 2010, the number had increased by 700 percent to 469,321, resulting in total penalties assessed of $1 billion, an increase of 228 percent. The number of corporations assessed such penalties grew from 1,342 to 3,640, although the increase in the amount of such penalties was not substantial.
The IRS is expected to continue to place great emphasis on accuracy-related penalties...
Section 6662 Accuracy-Related Penalty
Section 6662(a) of the Internal Revenue Code imposes an accuracy-related penalty equal to 20 percent of the underpayment to which Section 6662 applies. An understatement is equal to the excess of: (1) the amount of tax required to be shown in the tax return over (2) the amount of tax shown in the return.
Parsing the Section 6662 Penalty
[a] Penalty for Negligence or Disregard of Rules
The first two categories of penalties under Section 6662 involve underpayments attributable to: (1) negligence under Section 6662(b)(1), or (2) disregard of rules or regulations under Section 6662(b)(2). The penalties apply, regardless of the amount of the understatements.Negligence has been defined as a failure to do what a reasonable person would do under the circumstances. [Leuhsler v. Commissioner, 963 F.2d 907 (6th Cir. 1992)]...
[B] Duty of Taxpayer
In Woodsum v. Comm'r, 136 T.C. 585 (T.C. 2011), taxpayer Stephen Woodsum received income of $33 million, reported on over 160 information returns, which he provided to his accounting firm... Woodsum failed to prove the "most important factor." He did not fulfill his duty to review the return prepared by the accounting firm. The court could not hold that this understatement was attributable to reasonable cause and good faith.
[c] Disregard of Rules or Regulations: Definitions
The term "disregard" includes any careless, reckless, or intentional disregard. [Section 6662(c)]...
The term "rules or regulations" includes the provisions of the Internal Revenue Code, temporary or final Treasury regulations issued under the Code, and revenue rulings or notices (other than notices of proposed rulemaking) issued by the Internal Revenue Service and published in the Internal Revenue Bulletin. [Treas Reg § 1.6662-3(b)(2)].
[d] Penalty for Substantial Understatement of Tax
The Section 6662 penalty also applies to an under­payment that is "substantial." An understatement is substantial in the case of an individual or an S corporation if the amount of the understatement for the taxable year exceeds the greater of: (1) ten percent of the tax required to be shown in the tax return for that year, or (2) $5,000. [IRC § 6662(d)(1)(A)]...
[e] Penalty for Misstatement of Asset Value or Pension Liability
The 20 percent penalty may apply to an understatement of income tax caused by a substantial valuation misstatement. The misstatement is substantial if the value or basis of property is 150 percent or more of the amount determined to be correct. If the value misstatement is 200 percent or more, the penalty rate is 40 percent rather than 20 percent...
[f] Penalty for Transaction Lacking Economic Substance, or Undisclosed Asset
An enhanced penalty rate of 40 percent may apply to an understatement of income tax related to a noneconomic substance transaction, if the relevant facts affecting the tax treatment are not disclosed on the tax return or in a statement attached to the return...
An enhanced penalty rate of 40 percent may also apply to an understatement of income tax related to transaction involving an undisclosed foreign financial asset...
[g] Burden of Proof
In the U.S. Tax Court, determinations in an IRS notice of tax deficiency are generally presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. The burden of proof may shift to the IRS if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the income tax liability of the taxpayer... [But see IRC § 7491(a) and (c).]...
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