The Internal Revenue Code provides for penalties to deter taxpayers from underreporting their income, claiming bogus deductions, and engaging in other forms of misbehavior. For example, there is a twenty percent accuracy-related penalty that applies when a taxpayer negligently fails to follow regulations, materially understates his tax liability, or files a return with a substantial valuation misstatement. I.R.C. § 6662(a). That twenty percent penalty can be doubled if the return rests upon a gross valuation misstatement. I.R.C. § 6662(h).
For taxpayers who cross the line dividing negligent behavior from willful misconduct, there is a seventy-five percent fraud penalty. I.R.C. § 6663(a).… Read More