A 20 percent accuracy-related penalty under section 6662 is not automatic once an underpayment is identified. The Internal Revenue Code provides an exception for a taxpayer who shows reasonable cause and good faith, but that exception has to be proven with facts, not simply claimed after a notice arrives.
Tax compliance does not stop the moment a return is filed. The record a taxpayer builds while preparing a return, and afterward, often decides whether a later penalty holds up. If an examiner proposes an accuracy-related penalty, the reasonable cause and good faith exception under section 6664(c) can eliminate it, but only where the taxpayer can show, with evidence, what was done to get the return right. Tax problems are easier to manage before the IRS process controls the timeline. If you want a practical review of your exposure, planning options, or IRS correspondence, speak with Steve Perry, EA. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
What the Standard Requires
Under Treasury Regulation 1.6664-4, reasonable cause is determined case by case, based on all pertinent facts and circumstances. The regulation identifies the taxpayer’s effort to determine the correct tax liability as generally the most important factor. Relevant circumstances include the taxpayer’s experience, knowledge, and education, and whether an honest misunderstanding of fact or law was reasonable given those circumstances. An isolated computational or transcriptional error generally does not defeat the exception, but a pattern of errors from rushed, last-minute preparation can.
Why Hiring a Preparer Does Not Automatically Establish the Defense
A common assumption is that using a tax professional automatically satisfies reasonable cause if something later goes wrong. The regulation does not treat reliance on a professional as automatic protection. Courts applying this standard generally require three things: that the advisor was competent and had sufficient expertise for the matter, that the taxpayer supplied the advisor with complete and accurate information, and that the taxpayer relied on the advisor’s judgment in good faith. A taxpayer who withheld relevant facts from a preparer, or who knew the preparer lacked experience with the issue involved, does not meet this standard merely by pointing to the engagement. Before assuming your tax position is settled for the year, consider having Steve Perry, EA evaluate your records, IRS risk, and planning opportunities. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
The Burden Sits With the Taxpayer, Not the IRS
In a court proceeding, the IRS carries the initial burden of production to show that a penalty is appropriate. Once that burden is met, the burden shifts to the taxpayer to prove that reasonable cause applies. This means the taxpayer, not the examiner, has to come forward with evidence: what information was provided to a preparer, what records supported a position, what steps were taken to confirm a tax treatment was correct. A taxpayer who assumes the IRS has to disprove reasonable cause is working from the wrong starting point.
The Timing Problem Most Taxpayers Miss
Reasonable cause is not something built at the moment a penalty notice arrives. It depends on what the taxpayer did before and while the return was prepared, not on an explanation constructed afterward. Records showing the information given to a preparer, notes on research performed before a position was taken, and documentation supporting an information return relied upon all carry more weight than a general statement made after the fact that the error was unintentional. Once an examination has closed and a penalty is assessed, a taxpayer without contemporaneous records is left arguing from memory, which is a weaker position than one supported by documentation created at the time the decision was made. If IRS notices, unpaid balances, missing records, or planning gaps are starting to create concern, speak with Steve Perry, EA before the problem becomes harder to control. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
Factors the IRS Weighs Beyond the Immediate Error
Examiners are instructed to look beyond the single item at issue. Relevant considerations include the taxpayer’s compliance history over the preceding several years, whether the same type of error has occurred before, and how quickly the taxpayer corrected course once the issue became known. A first-time error weighed alongside a clean compliance history is treated differently than a repeated pattern involving the same mistake.
Common Misconceptions About This Defense
- Believing that hiring a preparer automatically satisfies reasonable cause, regardless of what information was provided
- Believing the IRS must disprove reasonable cause, when the burden of proof falls on the taxpayer once the IRS meets its initial burden of production
- Believing an explanation offered after a penalty notice arrives carries the same weight as records created while the return was prepared
- Believing a single, isolated mistake is treated the same as a pattern of repeated errors
- Believing reasonable cause applies automatically to any honest mistake, regardless of the taxpayer’s effort to get the return right
Other factors may apply depending on the specific facts and the type of position at issue.
Building the Defense Before It Is Needed
Reasonable cause is available in many cases, but it is proven with the record a taxpayer already has, not created after a penalty is proposed. Retaining engagement notes, documenting what was disclosed to a preparer, and keeping supporting records for positions taken on a return all strengthen this defense well before an examiner ever raises the issue. Good tax outcomes come from managing the year before the IRS forces the issue. For help reviewing your next steps, speak with Steve Perry, EA. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
Frequently Asked Questions
What is the reasonable cause exception to the accuracy-related penalty?
It is an exception under section 6664(c) that removes the section 6662 accuracy-related penalty for a portion of an underpayment where the taxpayer shows reasonable cause and good faith, based on all the facts and circumstances.
Does hiring a tax preparer automatically establish reasonable cause?
No. The taxpayer must also show the advisor was competent for the matter, that complete and accurate information was provided, and that the taxpayer relied on the advisor’s judgment in good faith.
Who has to prove reasonable cause applies?
The IRS carries the initial burden of production to show a penalty is warranted. Once that is met, the burden shifts to the taxpayer to prove reasonable cause with evidence.
Does a single mistake on a return usually trigger the penalty?
An isolated computational or transcriptional error generally does not defeat reasonable cause. A pattern of numerous errors from rushed or careless preparation is treated differently.
When should documentation supporting reasonable cause be created?
At the time the return is prepared, not after a penalty notice arrives. Records showing the information provided to a preparer and the research behind a position carry more weight than a later explanation.
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