How it works
Section 6662 imposes a 20 percent penalty on the portion of an underpayment caused by negligence or by a substantial understatement of income tax, which for individuals is the greater of 10 percent of the correct tax or 5,000 dollars. It is proposed in nearly every CP2000 and audit adjustment. It is waived under Section 6664 for reasonable cause and good faith, including documented reliance on a qualified professional’s written advice.
Why it matters
This is where an opinion letter or professional reliance does its work. A taxpayer who took a reasonable position on a genuinely unsettled question, and can show the analysis, usually avoids the penalty even if the IRS wins the underlying issue.
Example
An audit adds 50,000 dollars of tax on a wrapped token position the taxpayer treated as non-taxable. Because she obtained a written opinion before filing, the 10,000 dollar accuracy penalty is removed for reasonable cause, though the tax and interest remain.
Related: Section 6662, opinion letter, reasonable cause.
