Accuracy-Related Penalty Calculator IRC 6662

The accuracy-related penalty is assessed on underpayments of tax due to negligence, substantial understatement, or valuation misstatement. The base rate is 20% of the underpayment, but can increase to 40% or 50% for certain violations. The penalty is calculated on the portion of the underpayment attributable to the violation.

A substantial understatement occurs when your understatement exceeds the greater of 10% of the correct tax or $5,000 (for individuals). For C-corporations, it's the lesser of 10% of correct tax (or $10,000) or $10,000,000. If your understatement meets this threshold, a 20% penalty applies unless you have substantial authority or adequate disclosure.

You can avoid the penalty through: (1) Substantial authority - your position is more likely than not correct based on legal authorities; (2) Adequate disclosure - you disclosed the position on Form 8275 or 8275-R and had a reasonable basis; (3) Reasonable cause and good faith - you acted reasonably under the circumstances. Tax shelter items cannot use the disclosure exception.

A substantial valuation misstatement occurs when the value claimed is 150% or more of the correct value (20% penalty). A gross valuation misstatement occurs at 200% or more (40% penalty). These commonly apply to property donations, estate/gift tax valuations, and basis claims. The penalty only applies if the understatement exceeds $5,000.

Under IRC 6662(j), if your underpayment is attributable to an undisclosed foreign financial asset required to be reported on Form 8938, a 40% penalty applies instead of the standard 20%. This applies regardless of whether the understatement is substantial. Disclosure of foreign accounts on FBAR does not satisfy this requirement.

Under IRC 6662(k), overstatements of charitable contributions subject to the recapture rules of Section 170(p) are penalized at 50% - the highest accuracy-related penalty rate. This applies to donations of property like vehicles, art, and other items where the claimed value exceeds the actual value.

No, accuracy penalties do not stack. Under IRC 6662(c), only the highest applicable penalty rate applies. For example, if you have both a substantial understatement (20%) and charitable overstatement (50%), only the 50% penalty applies to the underpayment amount. You won't pay 70%.

Under IRC 6664(c), accuracy penalties are waived if you show reasonable cause and good faith. Key factors include: reliance on professional advice (CPA, attorney), complexity of the issue, and your history of compliance. You must provide complete and accurate information to your advisor. The IRS evaluates each case based on facts and circumstances.