An accuracy-related penalty applies to a tax underpayment due to "negligence or disregard of the rules and regulations." "Negligence" for this purpose includes any failure to make a reasonable attempt to comply with the Tax Code, to exercise ordinary and reasonable care in preparing your tax return, to keep adequate books and records, or to properly substantiate items on your return. A return position that has a reasonable basis is not negligent. A taxpayer can also qualify for relief by showing reasonable cause and good faith.

The negligence penalty is 20 percent of any portion of an underpayment caused by negligence or disregard of the rules and regulations. The maximum accuracy-related penalty is 20 percent even if that portion of the underpayment is attributable to more than one type of misconduct.

Example: John reports a tax liability of $20,000. The IRS determines that his correct liability is $30,000. $8,000 of the underpayment is due to John's "negligence." John owes a negligence penalty of $1,600 ($8,000 x 20%).

The negligence penalty that applies to an underpayment is not reduced for any carryover of a loss, deduction or credit may wipe out the underpayment.

Example: An audit of Carol's return results in a $3,000 underpayment attributable to negligence. She carries back a $5,000 net operating loss to the audit year. The carryback offsets the income tax owed on the underpayment but does not offset the penalty. Carol is still liable for a $600 negligence penalty ($3,000 x 20%).

If you have concerns about the proper preparation of your tax return, questions about the tax laws, or need help in keeping proper tax records, please do not hesitate to contact our office for assistance and answers to your questions.