An accuracy- related penalty of 20% can be imposed for underpayments of tax due to:

  • Negligence or disregard of rules or regulations,
  • Substantial understatement of tax,
  • Substantial valuation misstatement (increased to 40% for gross valuation misstatement),
  • Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or
  • Undisclosed foreign financial asset understatement (40% in all cases).

Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith.

If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty.

The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty

Accuracy-related penalties.

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