Question

What constitutes "substantial authority" for purposes of the penalty of for substantial understatement of tax?

Answer 1

Section 6662 of the Internal Revenue Code imposes an accuracy-related penalty of 20 percent of an underpayment of tax required to be shown on a return.

Internal Revenue Code (IRC) 6662(b) authorizes the Internal Revenue Service (IRS) to impose a penalty if an underpayment of income tax by a taxpayer exceeds a computational threshold called a substantial understatement. An understatement is reduced, however, by the portion attributable to an item for which the taxpayer had “substantial authority.” Substantial authority is defined in Treasury Regulation 1,66624(d)(2), but taxpayers are required to recognize and take into account the relative weight of various authorities such as regulations, revenue rulings, legislative histories, court cases and IRS pronouncements.