Question

6. What must a taxpayer prove to establish that an understatement of income tax should not be subject to the I.R.C. 6662 penalty because of the following? a. Reduction for substantial authority for return position. b. Reduction for disclosure in return.

Answer 1

Hey there !

In this question we need to explain that understatement of income tax should not be subject to section IRC 6662 in case of

1. Reduction for substantial authority for return position

2.. Reduction for disclosure in return.

Now first let us understaind what the code 6662 says:

As per IRC 662, IRS may impose a penalty in case when a taxpayer's negligence or disregard of rules or regulations has caused an underpayment of tax.

1. In order to prove or establish that an understatement of income tax should not be subject to the I.R.C. 6662 in case of Reduction for substantial authority for return position, the tax payer must explain that to avoid the imposition of a penalty for an understatement related to an undisclosed position, a practioner must meet the substantial authority standard with respect to the position.

There is requirement to explain that an undisclosed tax position would meet the substantial authority standard if the IRS challenged it. Under this standard, merely finding authority to support a position will likely not be acceptable. In order to comply with the higher standard.

2.. Reduction for disclosure in return.

The IRS has updated existing procedures and identified circumstances under which the disclosure on a taxpayer’s income tax return with respect to an item or position is adequate for purposes of: (1) reducing the understatement of income tax

Disclosure will have no effect for purposes of the Code Sec. 6662 penalty if the item or return position lacks a reasonable basis, is attributable to a tax shelter item, or is not properly substantiated.

I hope the above solution is clear to you now...do let me know in case of any concerns.

All the best !!