Question

IRS Practice and Procedure

What must a taxpayer prove to establish the defense of mistake for purposes of I.R.C 6662's?

Answer 1

IRC Section 6662(b)(2) authorizes IRS to impose penalty if an undertstament exceeds a threshold level that is if income is "substanitally understated".

An understatement is substantial if its is more than $5000 or 10% of the tax that must be shown on return.

PENALTY DEFENSE – REASONABLE CAUSE / MISTAKE

Section 6662 won't lead to a penalty if taxpayer has acted with "reasonable cause and in good faith". The most important factor is the extenet taxpayer made an effort to detrmine proper tax liability.

Reasonable Cause.

1. Usually most important factor are the effort of taxpayer , his experience, knowledge, education and reliance on tax advisor.
2. All facts including nature of tax investment, complextity of tax issues, Competence of tax advisor etc.