The accuracy-related penalty is a penalty imposed by the IRS when a taxpayer underpays their taxes due to negligence, disregard of IRS rules, or substantial understatement of income. The penalty can be up to 20% of the underpaid amount.
This penalty applies when:
- There is a substantial understatement of income tax (typically when the understatement exceeds 10% of the correct tax or $5,000, whichever is greater).
- Taxpayers show negligence by failing to make a reasonable attempt to comply with tax laws or intentionally disregarding them.
- Taxpayers overstate the value of property or deductions, leading to an underpayment.
To avoid the accuracy-related penalty, taxpayers should ensure that their tax returns are accurate, complete, and prepared in accordance with IRS rules. Taxpayers who receive the penalty may appeal or request abatement if they can demonstrate reasonable cause or that they acted in good faith.