Substantial Understatement Penalty – Paul Gaulkin CPA

penalty_noticeIn the case that a substantial understatement of income tax is evident on a tax return, a 20% penalty will be imposed according to IRC Sec. 6662(b)(2). There are however, a few defenses that can be used against the 20% penalty, these defenses include:

1. Insubstantial understatement defense

2. Substantial authority defense

3. Adequate disclosure defense

4. Reasonable cause/good faith defense

In most cases, the best defense in the disclosure defense. In order to use the disclosure defense, the disclosure must be sufficient enough to avoid both the substantial understatement penalty and the disregard penalty. The disclosure defense does not apply to the negligence penalty or tax shelter items.

Other Substantial Understatement Defenses

There are a few other defenses that can be used against the substantial understatement penalty, these include:

1. Expiration of the three/six year statute of limitations on assessment

2. Innocent spouse relief

3. In some cases, if the penalty has been assessed, abatement can be requested

As you can see, there are many defenses for an honest professional to use in the case of a substantial understatement of income tax on a tax return. These defenses should be used with adequate proof and an ability to convey the proof in the correct way.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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