Substantial Understatement Penalty

Substantial Understatement Penalty means:
the penalty that applies to any portion of an underpayment of income tax required to be shown on a tax return that is attributable to a substantial understatement of that income tax. Generally, the amount of an understatement of income tax is the excess of the tax required to be shown on the return over the tax actually shown (reduced by any tax rebates). An understatement is considered substantial if it exceeds the greater of (1) 10% of the tax required to be shown on the return and (2) $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company).

In determining whether an understatement is substantial, the understatement generally is reduced by the portion it is attributable to an item for which there was substantial authority or adequate disclosure. However, in the case of tax shelter items, the understatement is reduced only by the portion of it that is attributable to an item for which there was substantial authority and with respect to which the taxpayer reasonably believed that the claimed treatment of the item was more likely than not the proper treatment. Disclosure made with respect to a tax shelter item does not affect the amount of an understatement. See also accuracy-related penalty. Former IRC (check if this IRC provision is current here) §666l(b)(l).

State Income Tax