See I.R.M. pt. 20.1.3.iii. Failure to Deposit Penalty under I.R.C. § 6656.See I.R.M. pt. 20.1.4.iv.Return Related Penalties under I.R.C. §§ 6662, 6662A, 6663, and 6676.See I.R.M. pt. 20.1.5.v. Preparer, Promoter, and Material Advisor Penalties under I.R.C. §§ 6694, 6695, 6700, 6701, 6707, 6707A, 6708, 6713.See I.R.M. pt. 20.1.6.vi.

Accuracy-related penalties under section 6662 are among the most common penalties in the Tax Code. As a result, they are often at issue in tax litigation against the IRS. That raises the question: What are the burdens of proof and production when it comes to accuracy-related penalties?The Internal Revenue Code (I.R.C.) section 6662 addresses rules applicable to accuracy-related penalties for the underpayment of tax. Generally, I.R.C. § 6662 allows the IRS to impose an accuracy-related penalty of 20% of a portion of underpaid tax. See I.R.C. § 6662(a).

ax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.For a link to our podcast covering the Tax Court in Brief, downloadhereor check out other episodes ofThe Freeman Law Project.Tax Litigation: The Week of November 7th, 2022, through November 11th, 2022Green Valley Investors, LLC v. Comm’r, 159 T.C. No. 5 | November 9, 2022 | Weiler, J. | Dkt. Nos. 17379-19, 17380-19, 17381-19, 17382-19 (consolidated)Amos v. Comm’r, T.C. Memo. 2022-109 | November 10, 2022 | Urda, J. | Dkt. No. 4331-18Fields v. Comm’r, T.C. Summary Opinion 2022-22 | November 10, 2022 | Panuthos, Special Trial J. | Dkt. No. 2925-20S (IRS Automated Underreporter, gifts from employer, unreported gross income, and accuracy-related penalty)Summary: Pursuant to 26 U.S.C. § 7463(b), this decision is not reviewable by any other court, and the opinion shall not be treated as precedent for any other case. The case regards a deficiency determination and a 26 U.S.C. § 6662(a) accuracy-related penalty assessed against petitioners, Jennifer Fields (“Jennifer”) and Walter Fields (with Jennifer, the “Fields”). Jennifer worked for Paragon Canada ULC. Paragon Canada ULC operated in Canada, and it operated in the U.S. as Paragon Gaming (collectively, Paragon). She had a personal relationship with the CEO of Paragon, Scott Menke. On a few occasions, Paragon wired funds to or for Jennifer’s personal benefit, such as for use as a down payment to purchase a residence or other unspecified. In January 2017, she separated from Paragon. In a severance agreement, the respective parties agreed to a write-off of certain employee advances totaling $79,581.50. A revised draft severance agreement modified the consideration but was never signed. Jennifer executed a Form W–9, Request for Taxpayer Identification Number and Certification, which was provided to Paragon. Paragon issued to Jennifer and filed with the IRS a Form 1099–MISC, reporting $79,581 in other income for the yea

Finally, the IRS disallowed the operating loss deductions for other rental properties as passive losses and asserted failure-to-file and accuracy-related penalties.Key Issues: Whether the taxpayers are: (1) entitled to claim losses from their farming activities; (2) entitled to claim losses from their rental property activities; (3) liable for penalties under I.R.C. § 6651(a)(1) and I.R.C. § 6662.Primary Holdings: The taxpayers are: (1) not entitled to deduct losses from their farming activities because the losses were startup expenses under I.R.C. § 195(a); (2) not entitled to deduct operating losses related to one rental property because the property was not held for rental; (3) entitled to a loss deduction for certain other rental activities because the IRS erred in determining the losses were passive losses; (4) liable for I.R.C. § 6651(a)(1) and I.R.C. § 6662 penalties.Key Points of Law:Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business.Section 183(a) as a general rule disallows any deduction attributable to an activity not engaged in for profit; moreover, the Regulations under Section 183 lay out nine nonexclusive factors for determining whether an activity is engaged in for profit.

. Seeid. at § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). If the Commissioner carries his burden, normally the taxpayer has the burden of proving that any affirmative defenses apply, such as that the taxpayer acted with reasonable cause and in good faith.Additions to Tax and Penalties – B. Section 6662(a) Accuracy-Related Penalties. Section 6662(a) and (b)(1) provides for an accuracy-related penalty of 20% of the portion of an underpayment of tax required to be shown on a return attributable to negligence or disregard of rules and regulations (without distinction, negligence). Section 6662(a) and (b)(2) provides for the same penalty on the portion of an underpayment of tax attributable to any substantial understatement of income tax. In the case of an individual, there is a substantial understatement of income tax for a year if the amount of the understatement exceeds the greater of (1) 10% of the tax required to be shown on the return for the tax year or (2) $5,000. 26 U.S.C. § 6662(d)(1)(A). The amount of an understatement is reduced if there is substantial authority for the taxpayer’s treatment of an item on his return. See id. at § 6662(d)(2)(B)(i). The amount of the understatement is reduced for any item that is adequately disclosed in the taxpayer’s return, or in an attached statement, if there is reasonable basis for the taxpayer’s treatment of the item. Id. at § 6662(d)(2)(B)(ii).Reasonable Cause Exception. Section 6664(c)(1) provides a reasonable cause exception to imposition of the section 6662(a) accuracy-related penalty on that portion of an underpayment for which it is shown that there was reasonable cause for the underpayment and the taxpayer acted in good faith. Only one accuracy-related penalty may be applied with respect to any given portion of an underpayment even if that portion is subject to the penalty on more than one of the grounds set out in section 6662(b). Treas. Reg. § 1.6662-2(c).Burden of Production. The IRS’s burden of production with respect

In United States v. Woods, No. 12-562, 2013 U.S. LEXIS 8776 (December 3, 2013), the U.S. Supreme Court upheld the imposition of the 40 percent gross valuation misstatement penalty set forth in 26 U.S.C. § 6662 where the underpayment of tax resulted from a misstatement of basis. The Supreme Court’s holding in Woods emphasizes the significant tax consequences that can flow from a misstatement of basis.

professional with sufficient expertise to justify reliance; (2) that the taxpayer provided the adviser necessary and accurate information; and (3) that the taxpayer actually relied in good faith on the adviser’s judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). “Unconditional reliance on a tax return preparer or C.P.A. does not by itself constitute reasonable reliance in good faith; taxpayers must also exercise ‘[d]iligence and prudence’.” See Stough v. Commissioner, 144 T.C. 306, 323 (2015) (quoting Estate of Stiel v. Commissioner, T.C. Memo. 2009-278, 2009 WL 4877742, at *2)).Section 6662(a) Penalty. Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any underpayment of tax required to be show on a return that is attributable to negligence, disregard of rules or regulations, or a substantial understatement of income tax. Negligence includes “any failure to make a reasonable attempt to comply” with the Code, 26 U.S.C. § 6662(c), or a failure “to keep adequate books and records or to substantiate items properly,” Treas. Reg. § 1.6662-3(b)(1). An understatement of income tax is “substantial” if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. 26 U.S.C. § 6662(d)(1)(A). Generally, the IRS bears the initial burden of production of establishing via sufficient evidence that a taxpayer is liable for penalties and additions to tax; once this burden is met, the taxpayer must carry the burden of proof with regard to defenses such as reasonable cause. Id. at § 7491(c); see Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). The IRS bears the burden of proof with respect to a new penalty or increase in the amount of a penalty asserted in his answer. See Rader v. Commissioner, 143 T.C. 376, 389 (2014); Rule 142(a), aff’d in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015); see also RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39 (2017), aff’d sub nom. Blau v

t. I.R.C. § 61(a)(4). In cases of unreported income, the IRS’s determinations are presumptively correct if supported by a minimal evidentiary foundation connecting the taxpayer with an income producing activity. See Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), aff’g T.C. Memo. 1991-636; United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the IRS has established some evidentiary foundation linking the taxpayer with an income-producing activity, the burden shifts to the taxpayer to prove that the determinations are arbitrary or erroneous. See Blohm, 994 F.2d at 1549.Accuracy-Related Penalties. Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the portion of an underpayment that is attributable to negligence or disregard of rules or regulations. “Negligence” includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. I.R.C. § 6662(c); Treas. Reg. § 1.6662-3(b)(1). “Disregard” includes any careless, reckless, or intentional disregard of rules or regulations. I.R.C. § 6662(c); Treas. Reg. § 1.6662-3(b)(2). The IRS bears the burden of production with respect to a penalty imposed by section 6662(a) and is required to present sufficient evidence showing that the penalty is appropriate. See I.R.C. § 7491(c); Higbee, 116 T.C. at 446–47. This includes showing compliance with the procedural requirements of section 6751(b)(1). See I.R.C. § 7491(c). Once the IRS meets this burden of production, the taxpayer bears the burden of proving that the IRS’s determination is incorrect. Higbee, 116 T.C. at 447.Avoiding Penalties by Reasonable Cause. A taxpayer may avoid a section 6662(a) penalty by showing that there was reasonable cause for any portion of the underpayment and that the taxpayer acted in good faith. I.R.C. § 6664(c)(1). Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to

ether repayments were made; (6) what the source of any payments was; (7) whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and (8) whether the parties conducted themselves as if the transaction was a loan. Dixie Dairies Corp. v. Commissioner, 74 T.C. 476 (1980); see also Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C. Memo. 1998-121; Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972); Knutsen-Rowell, Inc. v. Commissioner, T.C. Memo. 2011-65.Penalties. Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any portion of an underpayment of tax required to be shown on a return that is attributable to negligence or disregard of rules or regulations or a substantial understatement of income tax. “Negligence” includes any failure to make a reasonable attempt to comply with the internal revenue laws or to exercise reasonable care in the preparation of a tax return. I.R.C. § 6662(c); Treas. Reg. § 1.6662-3(b)(1). “Disregard” includes any careless, reckless, or intentional disregard of the Code, regulations, or certain IRS administrative guidance. I.R.C. § 6662(c); Treas. Reg. § 1.6662-3(b)(2). An understatement of income tax is substantial if it exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. I.R.C. § 6662(d)(1)(A).Penalties – Burdens and Procedure. Under section 7491(c), the IRS bears the burden of production regarding penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties. Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). The IRS can meet that burden of production with regard to section 6662 by showing that the deficiencies exceed the greater of 10% of the tax required to be shown on the return or at least $5,000 for each year the penalty has been determined following a Rule 155 computation. However, part of the IRS’s burden of production in this

ick Buoniconti (a retired NFL Hall of Famer) and ultimately closed all Fuddruckers by 2011. The tax issues involved in the 2014 and 2015 tax returns regarded Amos’s carryforward— under 26 U.S.C. § 172—of NOLs relating to the Fuddruckers enterprise dating back to about 1999. By the time Amos filed her 2008 return, the NOL carryforward was near $6 million, and the NOL carryforward for each of the next three years exceeded $5 million. For 2012 and 2013, the NOL carryforward “dipped” to about $4.7 million. For her 2014 return, she claimed an NOL carryforward deduction of $4.2 million, resulting in negative $4.1 million of adjusted gross income. She claimed that the carryforwards were from losses incurred before 2012. A similar submission was made for the 2015 tax year. In February 2018, the IRS issued a notice of deficiency that determined deficiencies for 2014 and 2015, finding that Amos had not established that she sustained the loss in prior years. The IRS also assessed penalties under 26 U.S.C. § 6662(a).Key Issues:Whether or not the IRS’s notice of deficiency and penalty assessment were proper?Primary Holdings: Yes and yes. The determinations in the notice of deficiency to disallow the NOL deductions were upheld as were the section 6662(a) penalties. Amos (1) failed to provide sufficient evidence of the underlying NOLs in 1999 and 2000 and (2) failed to show that any NOL was available to carry forward to the years at issue. As for penalties, the IRS met its prima facie burden, and Amos failed to show that she acted with reasonable cause and in good faith with respect .Key Points of Law:Burdens of Proof. The IRS’s determinations in a notice of deficiency are generally presumed correct, and a taxpayer bears the burden of proving that the Commissioner’s determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The taxpayer also bears the burden of proving her entitlement to any deduction claimed. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).