Internal Revenue Code Section 6662:
Imposition of accuracy-related penalty on underpayments
Location in U.S. Code: Title 26F, Chapter 68-A, Part II
Sec. 6662. Imposition of accuracy-related penalty on underpayments
(a) Imposition of penalty
If this section applies to any portion of an underpayment of tax
required to be shown on a return, there shall be added to the tax
an amount equal to 20 percent of the portion of the underpayment to
which this section applies.
(b) Portion of underpayment to which section applies
This section shall apply to the portion of any underpayment which
is attributable to 1 or more of the following:
(1) Negligence or disregard of rules or regulations.
(2) Any substantial understatement of income tax.
(3) Any substantial valuation misstatement under chapter 1.
(4) Any substantial overstatement of pension liabilities.
(5) Any substantial estate or gift tax valuation
understatement.
This section shall not apply to any portion of an underpayment on
which a penalty is imposed under section 6663.
(c) Negligence
For purposes of this section, the term ''negligence'' includes
any failure to make a reasonable attempt to comply with the
provisions of this title, and the term ''disregard'' includes any
careless, reckless, or intentional disregard.
(d) Substantial understatement of income tax
(1) Substantial understatement
(A) In general
For purposes of this section, there is a substantial
understatement of income tax for any taxable year if the amount
of the understatement for the taxable year exceeds the greater
of -
(i) 10 percent of the tax required to be shown on the
return for the taxable year, or
(ii) $5,000.
(B) Special rule for corporations.--In the case of
a corporation other than an S corporation or a personal
holding company (as defined in section 542), there is a
substantial understatement of income tax for any taxable
year if the amount of the understatement for the taxable
year exceeds the lesser of--
(i) 10 percent of the tax required to be shown on
the return for the taxable year (or, if
greater, $10,000), or
(ii) $10,000,000.
(2) Understatement
(A) In general
For purposes of paragraph (1), the term ''understatement''
means the excess of -
(i) the amount of the tax required to be shown on the
return for the taxable year, over
(ii) the amount of the tax imposed which is shown on the
return, reduced by any rebate (within the meaning of section
6211(b)(2)).
The excess under the preceding sentence shall be determined
without regard to items to which section 6662A applies
and without regard to items with respect to which a penalty
is imposed by section 6662B.
(B) Reduction for understatement due to position of taxpayer or
disclosed item
The amount of the understatement under subparagraph (A) shall
be reduced by that portion of the understatement which is
attributable to -
(i) the tax treatment of any item by the taxpayer if there
is or was substantial authority for such treatment, or
(ii) any item if -
(I) the relevant facts affecting the item's tax treatment
are adequately disclosed in the return or in a statement
attached to the return, and
(II) there is a reasonable basis for the tax treatment of
such item by the taxpayer.
For purposes of clause (ii)(II), in no event shall a
corporation be treated as having a reasonable basis for its tax
treatment of an item attributable to a multiple-party financing
transaction if such treatment does not clearly reflect the
income of the corporation.
(C) Reduction not to apply to tax shelters.--
(i) In general.--Subparagraph (B) shall not
apply to any item attributable to a tax shelter.
(ii) Tax shelter.--For purposes of clause (i),
the term `tax shelter' means--
(I) a partnership or other entity,
(II) any investment plan or arrangement, or
(III) any other plan or arrangement,
if a significant purpose of such partnership,
entity, plan, or arrangement is the avoidance or
evasion of Federal income tax.
(D) [[Deleted by PL 108-357, Sec. 819(b)(2)]]
3) Secretarial list.--The Secretary may prescribe a list
of positions which the Secretary believes do not meet the 1 or
more of the standards specified in paragraph (2)(B)(i), section
6664(d)(2), and section 6694(a)(1). Such <<NOTE: Federal
Register, publication.>> list (and any revisions thereof) shall
be published in the Federal Register or the Internal Revenue
Bulletin.
(e) Substantial valuation misstatement under chapter 1
(1) In general
For purposes of this section, there is a substantial valuation
misstatement under chapter 1 if -
(A) the value of any property (or the adjusted basis of any
property) claimed on any return of tax imposed by chapter 1 is
200 percent or more of the amount determined to be the correct
amount of such valuation or adjusted basis (as the case may
be), or
(B)(i) the price for any property or services (or for the use
of property) claimed on any such return in connection with any
transaction between persons described in section 482 is 200
percent or more (or 50 percent or less) of the amount
determined under section 482 to be the correct amount of such
price, or
(ii) the net section 482 transfer price adjustment for the
taxable year exceeds the lesser of $5,000,000 or 10 percent of
the taxpayer's gross receipts.
(2) Limitation
No penalty shall be imposed by reason of subsection (b)(3)
unless the portion of the underpayment for the taxable year
attributable to substantial valuation misstatements under chapter
1 exceeds $5,000 ($10,000 in the case of a corporation other than
an S corporation or a personal holding company (as defined in
section 542)).
(3) Net section 482 transfer price adjustment
For purposes of this subsection -
(A) In general
The term ''net section 482 transfer price adjustment'' means,
with respect to any taxable year, the net increase in taxable
income for the taxable year (determined without regard to any
amount carried to such taxable year from another taxable year)
resulting from adjustments under section 482 in the price for
any property or services (or for the use of property).
(B) Certain adjustments excluded in determining threshold
For purposes of determining whether the threshold
requirements of paragraph (1)(B)(ii) are met, the following
shall be excluded:
(i) Any portion of the net increase in taxable income
referred to in subparagraph (A) which is attributable to any
redetermination of a price if -
(I) it is established that the taxpayer determined such
price in accordance with a specific pricing method set
forth in the regulations prescribed under section 482 and
that the taxpayer's use of such method was reasonable,
(II) the taxpayer has documentation (which was in
existence as of the time of filing the return) which sets
forth the determination of such price in accordance with
such a method and which establishes that the use of such
method was reasonable, and
(III) the taxpayer provides such documentation to the
Secretary within 30 days of a request for such
documentation.
(ii) Any portion of the net increase in taxable income
referred to in subparagraph (A) which is attributable to a
redetermination of price where such price was not determined
in accordance with such a specific pricing method if -
(I) the taxpayer establishes that none of such pricing
methods was likely to result in a price that would clearly
reflect income, the taxpayer used another pricing method to
determine such price, and such other pricing method was
likely to result in a price that would clearly reflect
income,
(II) the taxpayer has documentation (which was in
existence as of the time of filing the return) which sets
forth the determination of such price in accordance with
such other method and which establishes that the
requirements of subclause (I) were satisfied, and
(III) the taxpayer provides such documentation to the
Secretary within 30 days of request for such documentation.
(iii) Any portion of such net increase which is
attributable to any transaction solely between foreign
corporations unless, in the case of any such corporations,
the treatment of such transaction affects the determination
of income from sources within the United States or taxable
income effectively connected with the conduct of a trade or
business within the United States.
(C) Special rule
If the regular tax (as defined in section 55(c)) imposed by
chapter 1 on the taxpayer is determined by reference to an
amount other than taxable income, such amount shall be treated
as the taxable income of such taxpayer for purposes of this
paragraph.
(D) Coordination with reasonable cause exception
For purposes of section 6664(c) the taxpayer shall not be
treated as having reasonable cause for any portion of an
underpayment attributable to a net section 482 transfer price
adjustment unless such taxpayer meets the requirements of
clause (i), (ii), or (iii) of subparagraph (B) with respect to
such portion.
(f) Substantial overstatement of pension liabilities
(1) In general
For purposes of this section, there is a substantial
overstatement of pension liabilities if the actuarial
determination of the liabilities taken into account for purposes
of computing the deduction under paragraph (1) or (2) of section
404(a) is 200 percent or more of the amount determined to be the
correct amount of such liabilities.
(2) Limitation
No penalty shall be imposed by reason of subsection (b)(4)
unless the portion of the underpayment for the taxable year
attributable to substantial overstatements of pension liabilities
exceeds $1,000.
(g) Substantial estate or gift tax valuation understatement
(1) In general
For purposes of this section, there is a substantial estate or
gift tax valuation understatement if the value of any property
claimed on any return of tax imposed by subtitle B is 50 percent
or less of the amount determined to be the correct amount of such
valuation.
(2) Limitation
No penalty shall be imposed by reason of subsection (b)(5)
unless the portion of the underpayment attributable to
substantial estate or gift tax valuation understatements for the
taxable period (or, in the case of the tax imposed by chapter 11,
with respect to the estate of the decedent) exceeds $5,000.
(h) Increase in penalty in case of gross valuation misstatements
(1) In general
To the extent that a portion of the underpayment to which this
section applies is attributable to one or more gross valuation
misstatements, subsection (a) shall be applied with respect to
such portion by substituting ''40 percent'' for ''20 percent''.
(2) Gross valuation misstatements
The term ''gross valuation misstatements'' means -
(A) any substantial valuation misstatement under chapter 1 as
determined under subsection (e) by substituting -
(i) ''400 percent'' for ''200 percent'' each place it
appears,
(ii) ''25 percent'' for ''50 percent'', and
(iii) in paragraph (1)(B)(ii) -
(I) ''$20,000,000'' for ''$5,000,000'', and
(II) ''20 percent'' for ''10 percent''.
(B) any substantial overstatement of pension liabilities as
determined under subsection (f) by substituting ''400 percent''
for ''200 percent'', and
(C) any substantial estate or gift tax valuation
understatement as determined under subsection (g) by
substituting ''25 percent'' for ''50 percent''.