26 U.S.C. § 6662 : US Code - Section 6662: Imposition of accuracy-related penalty on underpayments

    (a) Imposition of penalty
      If this section applies to any portion of an underpayment of tax
    required to be shown on a return, there shall be added to the tax
    an amount equal to 20 percent of the portion of the underpayment to
    which this section applies.
    (b) Portion of underpayment to which section applies
      This section shall apply to the portion of any underpayment which
    is attributable to 1 or more of the following:
        (1) Negligence or disregard of rules or regulations.
        (2) Any substantial understatement of income tax.
        (3) Any substantial valuation misstatement under chapter 1.
        (4) Any substantial overstatement of pension liabilities.
        (5) Any substantial estate or gift tax valuation
      understatement.
        (6) Any disallowance of claimed tax benefits by reason of a
      transaction lacking economic substance (within the meaning of
      section 7701(o)) or failing to meet the requirements of any
      similar rule of law.
        (7) Any undisclosed foreign financial asset understatement.

    This section shall not apply to any portion of an underpayment on
    which a penalty is imposed under section 6663. Except as provided
    in paragraph (1) or (2)(B) of section 6662A(e), this section shall
    not apply to the portion of any underpayment which is attributable
    to a reportable transaction understatement on which a penalty is
    imposed under section 6662A.
    (c) Negligence
      For purposes of this section, the term "negligence" includes any
    failure to make a reasonable attempt to comply with the provisions
    of this title, and the term "disregard" includes any careless,
    reckless, or intentional disregard.
    (d) Substantial understatement of income tax
      (1) Substantial understatement
        (A) In general
          For purposes of this section, there is a substantial
        understatement of income tax for any taxable year if the amount
        of the understatement for the taxable year exceeds the greater
        of - 
            (i) 10 percent of the tax required to be shown on the
          return for the taxable year, or
            (ii) $5,000.
        (B) Special rule for corporations
          In the case of a corporation other than an S corporation or a
        personal holding company (as defined in section 542), there is
        a substantial understatement of income tax for any taxable year
        if the amount of the understatement for the taxable year
        exceeds the lesser of - 
            (i) 10 percent of the tax required to be shown on the
          return for the taxable year (or, if greater, $10,000), or
            (ii) $10,000,000.
      (2) Understatement
        (A) In general
          For purposes of paragraph (1), the term "understatement"
        means the excess of - 
            (i) the amount of the tax required to be shown on the
          return for the taxable year, over
            (ii) the amount of the tax imposed which is shown on the
          return, reduced by any rebate (within the meaning of section
          6211(b)(2)).

        The excess under the preceding sentence shall be determined
        without regard to items to which section 6662A applies.
        (B) Reduction for understatement due to position of taxpayer or
          disclosed item
          The amount of the understatement under subparagraph (A) shall
        be reduced by that portion of the understatement which is
        attributable to - 
            (i) the tax treatment of any item by the taxpayer if there
          is or was substantial authority for such treatment, or
            (ii) any item if - 
              (I) the relevant facts affecting the item's tax treatment
            are adequately disclosed in the return or in a statement
            attached to the return, and
              (II) there is a reasonable basis for the tax treatment of
            such item by the taxpayer.

        For purposes of clause (ii)(II), in no event shall a
        corporation be treated as having a reasonable basis for its tax
        treatment of an item attributable to a multiple-party financing
        transaction if such treatment does not clearly reflect the
        income of the corporation.
        (C) Reduction not to apply to tax shelters
          (i) In general
            Subparagraph (B) shall not apply to any item attributable
          to a tax shelter.
          (ii) Tax shelter
            For purposes of clause (i), the term "tax shelter" means - 
              (I) a partnership or other entity,
              (II) any investment plan or arrangement, or
              (III) any other plan or arrangement,

          if a significant purpose of such partnership, entity, plan,
          or arrangement is the avoidance or evasion of Federal income
          tax.
      (3) Secretarial list
        The Secretary may prescribe a list of positions which the
      Secretary believes do not meet 1 or more of the standards
      specified in paragraph (2)(B)(i), section 6664(d)(2),(!1) and
      section 6694(a)(1). Such list (and any revisions thereof) shall
      be published in the Federal Register or the Internal Revenue
      Bulletin.

    (e) Substantial valuation misstatement under chapter 1
      (1) In general
        For purposes of this section, there is a substantial valuation
      misstatement under chapter 1 if - 
          (A) the value of any property (or the adjusted basis of any
        property) claimed on any return of tax imposed by chapter 1 is
        150 percent or more of the amount determined to be the correct
        amount of such valuation or adjusted basis (as the case may
        be), or
          (B)(i) the price for any property or services (or for the use
        of property) claimed on any such return in connection with any
        transaction between persons described in section 482 is 200
        percent or more (or 50 percent or less) of the amount
        determined under section 482 to be the correct amount of such
        price, or
          (ii) the net section 482 transfer price adjustment for the
        taxable year exceeds the lesser of $5,000,000 or 10 percent of
        the taxpayer's gross receipts.
      (2) Limitation
        No penalty shall be imposed by reason of subsection (b)(3)
      unless the portion of the underpayment for the taxable year
      attributable to substantial valuation misstatements under chapter
      1 exceeds $5,000 ($10,000 in the case of a corporation other than
      an S corporation or a personal holding company (as defined in
      section 542)).
      (3) Net section 482 transfer price adjustment
        For purposes of this subsection - 
        (A) In general
          The term "net section 482 transfer price adjustment" means,
        with respect to any taxable year, the net increase in taxable
        income for the taxable year (determined without regard to any
        amount carried to such taxable year from another taxable year)
        resulting from adjustments under section 482 in the price for
        any property or services (or for the use of property).
        (B) Certain adjustments excluded in determining threshold
          For purposes of determining whether the threshold
        requirements of paragraph (1)(B)(ii) are met, the following
        shall be excluded:
            (i) Any portion of the net increase in taxable income
          referred to in subparagraph (A) which is attributable to any
          redetermination of a price if - 
              (I) it is established that the taxpayer determined such
            price in accordance with a specific pricing method set
            forth in the regulations prescribed under section 482 and
            that the taxpayer's use of such method was reasonable,
              (II) the taxpayer has documentation (which was in
            existence as of the time of filing the return) which sets
            forth the determination of such price in accordance with
            such a method and which establishes that the use of such
            method was reasonable, and
              (III) the taxpayer provides such documentation to the
            Secretary within 30 days of a request for such
            documentation.

            (ii) Any portion of the net increase in taxable income
          referred to in subparagraph (A) which is attributable to a
          redetermination of price where such price was not determined
          in accordance with such a specific pricing method if - 
              (I) the taxpayer establishes that none of such pricing
            methods was likely to result in a price that would clearly
            reflect income, the taxpayer used another pricing method to
            determine such price, and such other pricing method was
            likely to result in a price that would clearly reflect
            income,
              (II) the taxpayer has documentation (which was in
            existence as of the time of filing the return) which sets
            forth the determination of such price in accordance with
            such other method and which establishes that the
            requirements of subclause (I) were satisfied, and
              (III) the taxpayer provides such documentation to the
            Secretary within 30 days of request for such documentation.

            (iii) Any portion of such net increase which is
          attributable to any transaction solely between foreign
          corporations unless, in the case of any such corporations,
          the treatment of such transaction affects the determination
          of income from sources within the United States or taxable
          income effectively connected with the conduct of a trade or
          business within the United States.
        (C) Special rule
          If the regular tax (as defined in section 55(c)) imposed by
        chapter 1 on the taxpayer is determined by reference to an
        amount other than taxable income, such amount shall be treated
        as the taxable income of such taxpayer for purposes of this
        paragraph.
        (D) Coordination with reasonable cause exception
          For purposes of section 6664(c) the taxpayer shall not be
        treated as having reasonable cause for any portion of an
        underpayment attributable to a net section 482 transfer price
        adjustment unless such taxpayer meets the requirements of
        clause (i), (ii), or (iii) of subparagraph (B) with respect to
        such portion.
    (f) Substantial overstatement of pension liabilities
      (1) In general
        For purposes of this section, there is a substantial
      overstatement of pension liabilities if the actuarial
      determination of the liabilities taken into account for purposes
      of computing the deduction under paragraph (1) or (2) of section
      404(a) is 200 percent or more of the amount determined to be the
      correct amount of such liabilities.
      (2) Limitation
        No penalty shall be imposed by reason of subsection (b)(4)
      unless the portion of the underpayment for the taxable year
      attributable to substantial overstatements of pension liabilities
      exceeds $1,000.
    (g) Substantial estate or gift tax valuation understatement
      (1) In general
        For purposes of this section, there is a substantial estate or
      gift tax valuation understatement if the value of any property
      claimed on any return of tax imposed by subtitle B is 65 percent
      or less of the amount determined to be the correct amount of such
      valuation.
      (2) Limitation
        No penalty shall be imposed by reason of subsection (b)(5)
      unless the portion of the underpayment attributable to
      substantial estate or gift tax valuation understatements for the
      taxable period (or, in the case of the tax imposed by chapter 11,
      with respect to the estate of the decedent) exceeds $5,000.
    (h) Increase in penalty in case of gross valuation misstatements
      (1) In general
        To the extent that a portion of the underpayment to which this
      section applies is attributable to one or more gross valuation
      misstatements, subsection (a) shall be applied with respect to
      such portion by substituting "40 percent" for "20 percent".
      (2) Gross valuation misstatements
        The term "gross valuation misstatements" means - 
          (A) any substantial valuation misstatement under chapter 1 as
        determined under subsection (e) by substituting - 
            (i) in paragraph (1)(A), "200 percent" for "150 percent",
            (ii) in paragraph (1)(B)(i) - 
              (I) "400 percent" for "200 percent", and
              (II) "25 percent" for "50 percent", and

            (iii) in paragraph (1)(B)(ii) - 
              (I) "$20,000,000" for "$5,000,000", and
              (II) "20 percent" for "10 percent".

          (B) any substantial overstatement of pension liabilities as
        determined under subsection (f) by substituting "400 percent"
        for "200 percent", and
          (C) any substantial estate or gift tax valuation
        understatement as determined under subsection (g) by
        substituting "40 percent" for "65 percent".
    (j) (!2) Undisclosed foreign financial asset understatement

      (1) In general
        For purposes of this section, the term "undisclosed foreign
      financial asset understatement" means, for any taxable year, the
      portion of the understatement for such taxable year which is
      attributable to any transaction involving an undisclosed foreign
      financial asset.
      (2) Undisclosed foreign financial asset
        For purposes of this subsection, the term "undisclosed foreign
      financial asset" means, with respect to any taxable year, any
      asset with respect to which information was required to be
      provided under section 6038, 6038B, 6038D, 6046A, or 6048 for
      such taxable year but was not provided by the taxpayer as
      required under the provisions of those sections.
      (3) Increase in penalty for undisclosed foreign financial asset
        understatements
        In the case of any portion of an underpayment which is
      attributable to any undisclosed foreign financial asset
      understatement, subsection (a) shall be applied with respect to
      such portion by substituting "40 percent" for "20 percent".
    (i) (!3) Increase in penalty in case of nondisclosed noneconomic
      substance transactions

      (1) In general
        In the case of any portion of an underpayment which is
      attributable to one or more nondisclosed noneconomic substance
      transactions, subsection (a) shall be applied with respect to
      such portion by substituting "40 percent" for "20 percent".
      (2) Nondisclosed noneconomic substance transactions
        For purposes of this subsection, the term "nondisclosed
      noneconomic substance transaction" means any portion of a
      transaction described in subsection (b)(6) with respect to which
      the relevant facts affecting the tax treatment are not adequately
      disclosed in the return nor in a statement attached to the
      return.
      (3) Special rule for amended returns
        In no event shall any amendment or supplement to a return of
      tax be taken into account for purposes of this subsection if the
      amendment or supplement is filed after the earlier of the date
      the taxpayer is first contacted by the Secretary regarding the
      examination of the return or such other date as is specified by
      the Secretary.