What is Considered a Substantial Error by the IRS?

The IRS considers a substantial error to be a substantial tax understatement, also known as IRS negligence or tax negligence.

The substantial tax understatement penalty is usually a result of an IRS audit on your tax return. It could include failing to report income, understanding income, or overstating the tax basis that the IRS adjusts.

It doesn’t matter whether the misrepresentation was accidental; you could still face harsh penalties. That is why it is always beneficial to seek the advice of an IRS audit defense attorney.

If you are facing IRS penalties, then you should contact Ronald Arthur Stearns Sr. PLLC as soon as possible. The sooner you secure legal representation, the sooner we can get to work on your case. Utilizing our knowledge of tax law, we will fight to protect you from penalties, costs, and criminal prosecution.

Our law firm is comprised of experienced tax attorneys who are committed to tax resolution. Contact our office today at 210-853-2135.

What is the IRS Negligence Penalty?

The IRS will issue a negligence penalty if at least 20% of the underpayment was because of one of the following:

• Substantial understatement of income tax.
• Negligence or disregard of the rules or regulations.
• Substantial valuation misstatement.
• Disallowed claimed tax benefits due to economic substance.
• Substantial overstatement of pension liabilities.
• Undisclosed foreign financial asset understatements.
• Substantial estate and gift tax valuation understatement.

The most common infractions are a substantial understatement of income tax and negligence or disregard of the regulations.

What is a Substantial Understatement of Income Tax?

A substantial understatement of tax applies if you understate your personal tax liability by 10% or $5,000, whichever is more. As a business, the penalty applies if you understate your tax liability by 5%, or $10,000, whichever is more.

A substantial understatement penalty is 20% of the underpayment of tax that was understated on the return.

What is Negligence or Disregard of the Regulations?

Negligence is a failure to exercise ordinary and reasonable care. In relation to the IRS, negligence is a failure to make a reasonable attempt to comply with tax laws, such as a failure to keep proper records. Disregard is a term used for careless or intentional disregard for the law.

Negligence or disregard can also include failure to make reasonable inquiries from tax deductions that seem too good to be true.

When is the Accuracy-Related Penalty Assessed?

The accuracy-related penalty is often assessed by the IRS once it makes an adjustment to your tax account; this almost always involves an IRS audit.

When the IRS records an amount on its records, it can record the penalty on your IRS tax account. Once the penalty is assessed, the IRS can begin trying to collect the penalty.

However, the penalty may not be finally assessed until you exhaust your appeals. A tax defense attorney can review your case and determine what defenses may be available to you.

Substantial Authority

Substantial authority is used to describe the legal standard for a taxpayer’s position on a return. In order for a taxpayer’s position to be considered “substantially justified,” there must be adequate support from authorities such as judicial decisions, published rulings, technical advice from the Internal Revenue Service (IRS), and other reliable sources.

Tax Negligence Penalty Defenses

Regardless of the complexity of your case, we will work with you to secure the best possible outcome, whether that means settling or litigating on your behalf in court.

We will help you explore all possible defenses. Some common tax negligence penalty defenses include:

Adequate Disclosure

Another possible defense is that you adequately disclosed all relevant facts on your tax return. For this defense to be used, your tax return must have been timely filed, and your case must not involve a tax shelter.

No Understatement

Your defense attorney may be able to establish that there was no understatement. To do this, they will need to challenge the IRS’s position by filing a protest to dispute the tax, filing a tax court petition, or by filing a refund claim.

Reasonable Cause

If it can be shown that a portion of the underpayment has a reasonable cause, then the IRS can not issue accuracy penalties for this portion.

Although the term reasonable cause is not defined, some common justifications include:

• You hired a competent and professional tax advisor who was provided with all the relevant information, and they provided tax advice, which turned out to be wrong.
• You had health ailments that meant you lacked the mental or physical capacity to file an accurate tax return.
• You made an honest mistake and did not have sufficient expertise to understand that your tax position was incorrect.

What is Considered a Substantial Error by The IRS – FAQS