26 U.S.C. § 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. (6) Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law. (7) Any undisclosed foreign financial asset understatement. (8) Any inconsistent estate basis. (9) Any overstatement of the deduction provided in section 170(p). (10) Any disallowance of a deduction by reason of section 170(h)(7). This section shall not apply to any portion of an underpayment on which a penalty is imposed under section 6663. Except as provided in paragraph (1) or (2)(B) of section 6662A(e), this section shall not apply to the portion of any underpayment which is attributable to a reportable transaction understatement on which a penalty is imposed under section 6662A. **(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. (C) *Special rule for taxpayers claiming section 199A deduction* — In the case of any taxpayer who claims any deduction allowed under section 199A for the taxable year, subparagraph (A) shall be applied by substituting “5 percent” for “10 percent”. (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. (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. (3) **Secretarial list** — The Secretary may prescribe a list of positions which the Secretary believes do not meet 1 or more of the standards specified in paragraph (2)(B)(i), section 6664(d)(3), and section 6694(a)(1). Such 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 150 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 65 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) in paragraph (1)(A), “200 percent” for “150 percent”, (ii) in paragraph (1)(B)(i)— (I) “400 percent” for “200 percent”, and (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”, (C) any substantial estate or gift tax valuation understatement as determined under subsection (g) by substituting “40 percent” for “65 percent”, and (D) any disallowance of a deduction described in subsection (b)(10). **(i) Increase in penalty in case of nondisclosed noneconomic substance transactions** (1) **In general** — In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”. (2) **Nondisclosed noneconomic substance transactions** — For purposes of this subsection, the term “nondisclosed noneconomic substance transaction” means any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return. (3) **Special rule for amended returns** — In no event shall any amendment or supplement to a return of tax be taken into account for purposes of this subsection if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary. **(j) Undisclosed foreign financial asset understatement** (1) **In general** — For purposes of this section, the term “undisclosed foreign financial asset understatement” means, for any taxable year, the portion of the understatement for such taxable year which is attributable to any transaction involving an undisclosed foreign financial asset. (2) **Undisclosed foreign financial asset** — For purposes of this subsection, the term “undisclosed foreign financial asset” means, with respect to any taxable year, any asset with respect to which information was required to be provided under section 6038, 6038B, 6038D, 6046A, or 6048 for such taxable year but was not provided by the taxpayer as required under the provisions of those sections. (3) **Increase in penalty for undisclosed foreign financial asset understatements** — In the case of any portion of an underpayment which is attributable to any undisclosed foreign financial asset understatement, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”. **(k) Inconsistent estate basis reporting** For purposes of this section, the term “inconsistent estate basis” means any portion of an underpayment attributable to the failure to comply with section 1014(f). **(l) Increase in penalty in case of overstatement of qualified charitable contributions** In the case of any portion of an underpayment which is attributable to one or more overstatements of the deduction provided in section 170(p), subsection (a) shall be applied with respect to such portion by substituting “50 percent” for “20 percent”. **(m) Substantial understatement of income tax due to disallowance of applicable energy credits** (1) **In general** — In the case of a taxpayer for which there is a disallowance of an applicable energy credit for any taxable year, for purposes of determining whether there is a substantial understatement of income tax for such taxable year, subsection (d)(1) shall be applied— (A) in subparagraphs (A) and (B), by substituting “1 percent” for “10 percent” each place it appears, and (B) without regard to subparagraph (C). (2) **Disallowance of an applicable energy credit** — For purposes of this subsection, the term “disallowance of an applicable energy credit” means the disallowance of a credit under section 45X, 45Y, or 48E by reason of overstating the material assistance cost ratio (as determined under section 7701(a)(52)) with respect to any qualified facility, energy storage technology, or facility which produces eligible components.