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U.S. IRS Releases Practice Unit Providing an Overview of Accuracy-Related Penalties

The U.S. IRS has released an international practice unit, Overview of Accuracy-Related Penalties. The general overview of the practice unit is provided as follows:

Taxpayers who do not use reasonable care in complying with federal income tax laws may be subject to penalties. Penalties are used to encourage taxpayers to voluntarily comply. If a taxpayer underpays and has no valid defense, penalties will apply.

IRC 6662 summarizes penalties related to return accuracy. An accuracy-related penalty can apply to an income, estate or gift tax return. IRC 6751(b)(1) requires that the examiner's immediate supervisor approve the penalty assertion. The supervisory approval must be documented in the workpaper or lead sheet and must be obtained prior to issuing any written communication of the penalty to the taxpayer that offers an opportunity to sign agreeing to the proposal or assessment of it. Refer to IRM 20.1.1 for additional guidance.

The Service applies accuracy-related penalties to tax underpayments caused by one or more of the prohibited acts described in this Unit. Generally, the penalty is 20%, but may be 40% in certain situations. Accuracy-related penalties are not cumulative; the penalty cannot be imposed more than once, even if the underpayment is attributable to several types of misconduct. If two penalties could apply to the same underpayment, you must only impose the penalty with the highest rate or broadest applicability

An accuracy-related penalty does not apply in three instances:

  1. The penalty does not apply if the Internal Revenue Service files the return under IRC 6020(b), Substitute for Return procedures. The return must have been filed by the taxpayer to apply.
  2. The accuracy-related penalty does not apply to any portion of an underpayment associated with a fraud penalty under IRC 6663.
  3. The penalty does not apply to any portion of an underpayment subject to the reportable transaction penalty under IRC 6662A.

Before imposing an accuracy-related penalty, carefully consider if the taxpayer can rely on any exceptions and defenses. The general rule is an accuracy-related penalty does not apply to any portion of an underpayment if the taxpayer has reasonable cause and acted in good faith. Additionally, the taxpayer may be able to rely on other defenses for some of the accuracy-related penalties, such as adequate disclosure, reasonable basis, and substantial authority. These taxpayer defenses will be discussed in this Unit.

Deficiency procedures under IRC 6665 allow a taxpayer to challenge penalty assertion in Tax Court before it is assessed.

Click the following link for the International Practice Units page on the IRS website.

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