Substantial Understatement Penalty

IRS Definition

The substantial understatement component of the accuracy-related penalty provides for a dollar criteria. If the understatement exceeds the greater of 10% of the tax required to be shown on the return, or $5,000 ($10,000 for corporations other than S corporations or personal holding companies), the penalty applies.

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If you understate the tax on your return by 10% (or more) of what you should have reported — or if the understated amount is more than $5,000, the IRS can charge a substantial understatement accuracy penalty.

If you can show that you made a reasonable attempt to report the correct tax, the IRS typically doesn’t charge the 20% substantial understatement penalty.

Learn how to address IRS penalties.

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