Internal Revenue Code:Sec. 6662. Imposition of accuracy-related penalty on underpayments
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TITLE 26 - INTERNAL REVENUE CODE
Subtitle F - Procedure and Administration
CHAPTER 68 - ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND
ASSESSABLE PENALTIES
Subchapter A - Additions to the Tax and Additional Amounts
PART II - ACCURACY-RELATED AND FRAUD PENALTIES
Statute
Sec. 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.
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.
(D) [[Deleted by PL 108-357, Sec. 819(b)(2)]]
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), and section 6694(a)(1). Such <<NOTE: Federal
Register, publication.>> 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
(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''.
Sources
(Added Pub. L. 101-239, title VII, Sec. 7721(a), Dec. 19, 1989, 103
Stat. 2395; amended Pub. L. 101-508, title XI, Sec. 11312(a), (b),
Nov. 5, 1990, 104 Stat. 1388-454, 1388-455; Pub. L. 103-66, title
XIII, Sec. 13236(a)-(d), 13251(a), Aug. 10, 1993, 107 Stat. 505,
506, 531; Pub. L. 103-465, title VII, Sec. 744(a), (b), Dec. 8,
1994, 108 Stat. 5011; Pub. L. 105-34, title X, Sec. 1028(c), Aug.
5, 1997, 111 Stat. 928.)
Miscellaneous
PRIOR PROVISIONS
A prior section 6662, acts Aug. 16, 1954, ch. 736, 68A Stat. 827,
Sec. 6659; May 14, 1960, Pub. L. 86-470, Sec. 1, 74 Stat. 132; Dec.
30, 1969, Pub. L. 91-172, title I, Sec. 101(j)(51), 83 Stat. 531;
Sept. 2, 1974, Pub. L. 93-406, title II, Sec. 1016(a)(19), 88 Stat.
931; renumbered Sec. 6660, Aug. 13, 1981, Pub. L. 97-34, title VII,
Sec. 722(a)(1), 95 Stat. 341; renumbered Sec. 6662, Sept. 3, 1982,
Pub. L. 97-248, title III, Sec. 323(a), 96 Stat. 613, directed that
additions be treated as tax and set procedure for assessing certain
additions to tax, prior to repeal by Pub. L. 101-239, title VII,
Sec. 7721(a), Dec. 19, 1989, 103 Stat. 2395, applicable to returns
the due date for which (determined without regard to extensions) is
after Dec. 31, 1989. See section 6665 of this title.
AMENDMENTS
2006 - Pension Protection Act of 2006 (P.L. 109-280)
SEC. 1219. PROVISIONS RELATING TO SUBSTANTIAL AND GROSS OVERSTATEMENTS
OF VALUATIONS.
(a) Modification of Thresholds for Substantial and Gross Valuation
Misstatements.--
(1) Substantial valuation misstatement.--
(A) Income taxes.--Subparagraph (A) of section
6662(e)(1) <<NOTE: 26 USC 6662.>> (relating to
substantial valuation misstatement under chapter 1) is
amended by striking ``200 percent'' and inserting ``150
percent''.
(B) Estate and gift taxes.--Paragraph (1) of section
6662(g) is amended by striking ``50 percent'' and
inserting ``65 percent''.
(2) Gross valuation misstatement.--
(A) Income taxes.--Clauses (i) and (ii) of section
6662(h)(2)(A) (relating to increase in penalty in case
of gross valuation misstatements) are amended to read as
follows:
``(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''.
(B) Estate and gift taxes.--Subparagraph (C) of
section 6662(h)(2) is amended by striking `` `25
percent' for `50 percent' '' and inserting `` `40
percent' for `65 percent' ''.
2005 - P.L. 109-135, Section 403
(x) Amendments Related to Section 812 of the Act.--
(1) Subsection (b) of section 6662 is <<NOTE: 26 USC
6662.>> amended by adding at the end the following new sentence:
``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.''.
2004 - Subsec.806,Pub.L.108-357, added---NOTE:Deadlines.
Reports.>>Studies.
(a) Transfer Pricing Rules.--The Secretary of the Treasury or the
Secretary's delegate shall conduct a study regarding the effectiveness
of current transfer pricing rules and compliance efforts in ensuring
that cross-border transfers and other related-party transactions,
particularly transactions involving intangible assets, service
contracts, or leases cannot be used improperly to shift income out of
the United States. The study shall include a review of the
contemporaneous documentation and penalty rules under section 6662 of
the Internal Revenue Code of 1986, a review of the regulatory and
administrative guidance implementing the principles of section 482 of
such Code to transactions involving intangible property and services and
to cost-sharing arrangements, and an examination of whether increased
disclosure of cross-border transactions should be required. The study
shall set forth specific
recommendations to address all abuses identified in the study. Not later
than June 30, 2005, such Secretary or delegate shall submit to the
Congress a report of such study.
(b) Income Tax Treaties.--The Secretary of the Treasury or the
Secretary's delegate shall conduct a study of United States income tax
treaties to identify any inappropriate reductions in United States
withholding tax that provide opportunities for shifting income out of
the United States, and to evaluate whether existing anti-abuse
mechanisms are operating properly. The study shall include specific
recommendations to address all inappropriate uses of tax treaties. Not
later than June 30, 2005, such Secretary or delegate shall submit to the
Congress a report of such study.
(c) Effectiveness of Corporate Expatriation Provisions.--The
Secretary of the Treasury or the Secretary's delegate shall conduct a
study of the effectiveness of the provisions of this title on corporate
expatriation. The study shall include such recommendations as such
Secretary or delegate may have to improve the effectiveness of such
provisions in carrying out the purposes of this title. Not later than
December 31, 2006, such Secretary or delegate shall submit to the
Congress a report of such study.
2004 - Pub. L. 108-357, Sec. 819. Section 6662(d)(1)(B)
(relating to special rule for corporations) is amended to
by inserting a new sub-paragraph (b) "(B) Special rule for
corporations.--"; Section 6662(d) is amended by adding at the
end the following new paragraph: "(3) Secretarial list.--...";
Paragraph (2) of section 6662(d) is amended by striking
subparagraph (D).
Effective Date.--The <<NOTE: 26 USC 6662 note.>> amendments made
by this section shall apply to taxable years beginning after the
date of the enactment of this Act.
2004 - Pub. L. 108-357, Sec. 812. Subparagraph (A) of
section 6662(d)(2) is amended by adding at the end the
following flush sentence: "The excess under the preceding
sentence shall be determined without regard to items to which
section 6662A applies."
The heading for section 6662 is amended to read as follows:
"Sec. 6662. Imposition of accuracy-related penalty on underpayments."
Subsection (C) of section 6662(d)(2) is amended by striking and
inserting a new subsection (C).
Effective Date.--The <<NOTE: 26 USC 6662 note.>> amendments made
by this section shall apply to taxable years ending after the date
of the enactment of this Act.
1997 - Subsec. (d)(2)(B). Pub. L. 105-34, Sec. 1028(c)(1),
inserted concluding provisions.
Subsec. (d)(2)(C)(iii). Pub. L. 105-34, Sec. 1028(c)(2),
substituted ''a significant purpose'' for ''the principal purpose''
in concluding provisions.
1994 - Subsec. (d)(2)(C)(i). Pub. L. 103-465, Sec. 744(b)(1),
substituted ''In the case of any item of a taxpayer other than a
corporation which is'' for ''In the case of any item'' in
introductory provisions.
Subsec. (d)(2)(C)(ii). Pub. L. 103-465, Sec. 744(a), added cl.
(ii). Former cl. (ii) redesignated (iii).
Subsec. (d)(2)(C)(iii). Pub. L. 103-465, Sec. 744(a), (b)(2),
redesignated cl. (ii) as (iii) and substituted ''this
subparagraph'' for ''clause (i)'' in introductory provisions.
1993 - Subsec. (d)(2)(B)(ii). Pub. L. 103-66, Sec. 13251(a),
amended cl. (ii) generally. Prior to amendment, cl. (ii) read as
follows: ''any item with respect to which the relevant facts
affecting the item's tax treatment are adequately disclosed in the
return or in a statement attached to the return.''
Subsec. (e)(1)(B)(ii). Pub. L. 103-66, Sec. 13236(a), amended cl.
(ii) generally. Prior to amendment, cl. (ii) read as follows:
''the net section 482 transfer price adjustment for the taxable
year exceeds $10,000,000.''
Subsec. (e)(3)(B). Pub. L. 103-66, Sec. 13236(b), amended heading
and text of subpar. (B) generally. Prior to amendment, text read
as follows: ''For purposes of determining whether the $10,000,000
threshold requirement of paragraph (1)(B)(ii) is met, there 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 it is shown that there was a
reasonable cause for the taxpayer's determination of such price
and that the taxpayer acted in good faith with respect to such
price, and
''(ii) any portion of such net increase which is attributable
to any transaction solely between foreign corporations unless, in
the case of any of 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.''
Subsec. (e)(3)(D). Pub. L. 103-66, Sec. 13236(c), added subpar.
(D).
Subsec. (h)(2)(A)(iii). Pub. L. 103-66, Sec. 13236(d), amended
cl. (iii) generally. Prior to amendment, cl. (iii) read as
follows: '' '$20,000,000' for '$10,000,000',''.
1990 - Subsec. (b)(3). Pub. L. 101-508, Sec. 11312(b)(1), amended
par. (3) generally, substituting ''misstatement'' for
''overstatement''.
Subsec. (e). Pub. L. 101-508, Sec. 11312(a), substituted
''misstatement'' for ''overstatement'' in heading and amended text
generally. Prior to amendment, text read as follows:
''(1) In general. - For purposes of this section, there is a
substantial valuation overstatement under chapter 1 if the value of
any property (or the adjusted basis of any property) claimed on any
return of tax imposed by chapter 1 is 200 percent or more of the
amount determined to be the correct amount of such valuation or
adjusted basis (as the case may be).
''(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 overstatements
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)).''
Subsec. (h)(2)(A). Pub. L. 101-508, Sec. 11312(b)(2), amended
subpar. (A) generally. Prior to amendment, subpar. (A) read as
follows: ''any substantial valuation overstatement under chapter 1
as determined under subsection (e) by substituting '400 percent'
for '200 percent',''.
EFFECTIVE DATE OF 2005 AMENDMENT
Amendment by S.A.F.E. Transportation Equity Act of 2005,
Sec.5522(b)(1) shall apply to transactions entered into after
the date of the enactment of this Act.
EFFECTIVE DATE OF 1997 AMENDMENT
Amendment by Pub. L. 105-34 applicable to items with respect to
transactions entered into after Aug. 5, 1997, see section
1028(e)(2) of Pub. L. 105-34, set out as a note under section 6111
of this title.
EFFECTIVE DATE OF 1994 AMENDMENT
Section 744(c) of Pub. L. 103-465 provided that: ''The amendments
made by this section (amending this section) shall apply to items
related to transactions occurring after the date of the enactment
of this Act (Dec. 8, 1994).''
EFFECTIVE DATE OF 1993 AMENDMENT
Section 13236(e) of Pub. L. 103-66 provided that: ''The
amendments made by this section (amending this section) shall apply
to taxable years beginning after December 31, 1993.''
Section 13251(b) of Pub. L. 103-66 provided that: ''The amendment
made by this section (amending this section) shall apply to returns
the due dates for which (determined without regard to extensions)
are after December 31, 1993.''
EFFECTIVE DATE OF 1990 AMENDMENT
Section 11312(c) of Pub. L. 101-508 provided that: ''The
amendments made by this section (amending this section) shall apply
to taxable years ending after the date of the enactment of this Act
(Nov. 5, 1990).''
EFFECTIVE DATE
Part applicable to returns the due date for which (determined
without regard to extensions) is after Dec. 31, 1989, see section
7721(d) of Pub. L. 101-239, set out as an Effective Date of 1989
Amendment note under section 461 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 461, 1274, 6015, 6694,
7525 of this title.
