26 USC 6663 - Imposition of fraud penalty

Collapse to view only § 6663. Imposition of fraud penalty

§ 6662. Imposition of accuracy-related penalty on underpayments
§ 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions
§ 6663. Imposition of fraud penalty
§ 6664. Definitions and special rules

§ 6662. Imposition of accuracy-related penalty on underpayments

(a) Imposition of penalty

(b) Portion of underpayment to which section appliesThis 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.

(d) Substantial understatement of income tax

(1) Substantial understatement

(A) In generalFor 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 corporationsIn 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.

(2) Understatement

(A) In generalFor 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 itemThe 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.

(i) In general

(ii) Tax shelterFor 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

(e) Substantial valuation misstatement under chapter 1

(1) In generalFor 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

(3) Net section 482 transfer price adjustmentFor purposes of this subsection—

(A) In general

(B) Certain adjustments excluded in determining thresholdFor 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.

(D) Coordination with reasonable cause exception

(f) Substantial overstatement of pension liabilities

(1) In general

(2) Limitation

(g) Substantial estate or gift tax valuation understatement

(1) In general

(2) Limitation

(h) Increase in penalty in case of gross valuation misstatements

(1) In general

(2) Gross valuation misstatementsThe 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

(2) Nondisclosed noneconomic substance transactions

(3) Special rule for amended returns

(j) Undisclosed foreign financial asset understatement

(1) In general

(2) Undisclosed foreign financial asset

(3) Increase in penalty for undisclosed foreign financial asset understatements

(k) Inconsistent estate basis reporting

(l) Increase in penalty in case of overstatement of qualified charitable contributions

(Added Pub. L. 101–239, title VII, § 7721(a), Dec. 19, 1989, 103 Stat. 2395; amended Pub. L. 101–508, title XI, § 11312(a), (b), Nov. 5, 1990, 104 Stat. 1388–454, 1388–455; Pub. L. 103–66, title XIII, §§ 13236(a)–(d), 13251(a), Aug. 10, 1993,

§ 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions

(a) Imposition of penalty

(b) Reportable transaction understatementFor purposes of this section—

(1) In generalThe term “reportable transaction understatement” means the sum of—

(A) the product of—

(i) the amount of the increase (if any) in taxable income which results from a difference between the proper tax treatment of an item to which this section applies and the taxpayer’s treatment of such item (as shown on the taxpayer’s return of tax), and

(ii) the highest rate of tax imposed by section 1 (section 11 in the case of a taxpayer which is a corporation), and

(B) the amount of the decrease (if any) in the aggregate amount of credits determined under subtitle A which results from a difference between the taxpayer’s treatment of an item to which this section applies (as shown on the taxpayer’s return of tax) and the proper tax treatment of such item.

For purposes of subparagraph (A), any reduction of the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable income.

(2) Items to which section appliesThis section shall apply to any item which is attributable to—

(A) any listed transaction, and

(B) any reportable transaction (other than a listed transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.

(d) Definitions of reportable and listed transactions

(e) Special rules

(1) Coordination with penalties, etc., on other understatementsIn the case of an understatement (as defined in section 6662(d)(2))—

(A) the amount of such understatement (determined without regard to this paragraph) shall be increased by the aggregate amount of reportable transaction understatements for purposes of determining whether such understatement is a substantial understatement under section 6662(d)(1), and

(B) the addition to tax under section 6662(a) shall apply only to the excess of the amount of the substantial understatement (if any) after the application of subparagraph (A) over the aggregate amount of reportable transaction understatements.

(2) Coordination with other penalties

(A) Coordination with fraud penalty

(B) Coordination with certain increased underpayment penalties

(3) Special rule for amended returns

(Added Pub. L. 108–357, title VIII, § 812(a), Oct. 22, 2004, 118 Stat. 1577; amended Pub. L. 109–135, title IV, § 403(x)(2), Dec. 21, 2005, 119 Stat. 2629; Pub. L. 111–152, title I, § 1409(b)(3), Mar. 30, 2010, 124 Stat. 1069; Pub. L. 113–295, div. A, title II, § 220(w), Dec. 19, 2014, 128 Stat. 4036.)

§ 6663. Imposition of fraud penalty

(a) Imposition of penalty

(b) Determination of portion attributable to fraud

(Added Pub. L. 101–239, title VII, § 7721(a), Dec. 19, 1989, 103 Stat. 2397.)

§ 6664. Definitions and special rules

(a) UnderpaymentFor purposes of this part, the term “underpayment” means the amount by which any tax imposed by this title exceeds the excess of—

(1) the sum of—

(A) the amount shown as the tax by the taxpayer on his return, plus

(B) amounts not so shown previously assessed (or collected without assessment), over

(2) the amount of rebates made.

For purposes of paragraph (2), the term “rebate” means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed was less than the excess of the amount specified in paragraph (1) over the rebates previously made. A rule similar to the rule of section 6211(b)(4) shall apply for purposes of this subsection.

(b) Penalties applicable only where return filed

(1) In general

(2) Exception

(3) Special rule for certain valuation overstatementsIn the case of any underpayment attributable to a substantial or gross valuation overstatement under chapter 1 with respect to charitable deduction property, paragraph (1) shall not apply. The preceding sentence shall not apply to a substantial valuation overstatement under chapter 1 if—

(A) the claimed value of the property was based on a qualified appraisal made by a qualified appraiser, and

(B) in addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contributed property.

(4) DefinitionsFor purposes of this subsection—

(A) Charitable deduction property

(B) Qualified appraisal

(d) Reasonable cause exception for reportable transaction understatements

(1) In general

(2) Exception

(3) Special rulesParagraph (1) shall not apply to any reportable transaction understatement unless—

(A) the relevant facts affecting the tax treatment of the item are adequately disclosed in accordance with the regulations prescribed under section 6011,

(B) there is or was substantial authority for such treatment, and

A taxpayer failing to adequately disclose in accordance with section 6011 shall be treated as meeting the requirements of subparagraph (A) if the penalty for such failure was rescinded under section 6707A(d).

(4) Rules relating to reasonable beliefFor purposes of paragraph (3)(C)—

(A) In generalA taxpayer shall be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief—

(i) is based on the facts and law that exist at the time the return of tax which includes such tax treatment is filed, and

(ii) relates solely to the taxpayer’s chances of success on the merits of such treatment and does not take into account the possibility that a return will not be audited, such treatment will not be raised on audit, or such treatment will be resolved through settlement if it is raised.

(B) Certain opinions may not be relied upon

(i) In generalAn opinion of a tax advisor may not be relied upon to establish the reasonable belief of a taxpayer if—(I) the tax advisor is described in clause (ii), or(II) the opinion is described in clause (iii).

(ii) Disqualified tax advisorsA tax advisor is described in this clause if the tax advisor—(I) is a material advisor (within the meaning of section 6111(b)(1)) and participates in the organization, management, promotion, or sale of the transaction or is related (within the meaning of section 267(b) or 707(b)(1)) to any person who so participates,(II) is compensated directly or indirectly by a material advisor with respect to the transaction,(III) has a fee arrangement with respect to the transaction which is contingent on all or part of the intended tax benefits from the transaction being sustained, or(IV) as determined under regulations prescribed by the Secretary, has a disqualifying financial interest with respect to the transaction.

(iii) Disqualified opinionsFor purposes of clause (i), an opinion is disqualified if the opinion—(I) is based on unreasonable factual or legal assumptions (including assumptions as to future events),(II) unreasonably relies on representations, statements, findings, or agreements of the taxpayer or any other person,(III) does not identify and consider all relevant facts, or(IV) fails to meet any other requirement as the Secretary may prescribe.

(Added Pub. L. 101–239, title VII, § 7721(a), Dec. 19, 1989, 103 Stat. 2398; amended Pub. L. 108–357, title VIII, § 812(c), Oct. 22, 2004, 118 Stat. 1579; Pub. L. 109–280, title XII, § 1219(a)(3), (c)(2), Aug. 17, 2006, 120 Stat. 1084, 1085; Pub. L. 111–152, title I, § 1409(c), Mar. 30, 2010, 124 Stat. 1069; Pub. L. 114–113, div. Q, title II, § 209(a), Dec. 18, 2015, 129 Stat. 3084; Pub. L. 117–328, div. T, title VI, § 605(a)(2)(C), Dec. 29, 2022, 136 Stat. 5394.)