---
kind: "range"
citation: "26 C.F.R. §§ 1.6662-1–1.6662-3"
title: "26"
from: "1.6662-1"
to: "1.6662-3"
count: 3
url: "https://uscodex.org/cfr/26/1.6662-1..1.6662-3"
---

# §1.6662-1. Overview of the accuracy-related penalty.


[Section 6662](/cfr/26/6662.md) imposes an accuracy-related penalty on any portion of an underpayment of tax required to be shown on a return that is attributable to one or more of the following:

- (a) Negligence or disregard of rules or regulations;
- (b) Any substantial understatement of income tax;
- (c) Any substantial valuation misstatement under chapter 1;
- (d) Any substantial overstatement of pension liabilities; or
- (e) **Any substantial estate or gift tax valuation understatement.**

# §1.6662-2. Accuracy-related penalty.

- (a) **In general.** [Section 6662(a)](/cfr/26/6662.md?p=a) imposes an accuracy-related penalty on any portion of an underpayment of tax (as defined in [section 6664(a)](/cfr/26/6664.md?p=a) and [§ 1.6664-2](/cfr/26/1.6664-2.md)) required to be shown on a return if such portion is attributable to one or more of the following types of misconduct:
  - (1) Negligence or disregard of rules or regulations (see [§ 1.6662-3](/cfr/26/1.6662-3.md));
  - (2) Any substantial understatement of income tax (see [§ 1.6662-4](/cfr/26/1.6662-4.md)); or
  - (3) Any substantial (or gross) valuation misstatement under chapter 1 (“substantial valuation misstatement” or “gross valuation misstatement”), provided the applicable dollar limitation set forth in [section 6662(e)(2)](/cfr/26/6662.md?p=e-2) is satisfied (see [§ 1.6662-5](/cfr/26/1.6662-5.md)).
- (b) **Amount of penalty—**
  - (1) **In general.** The amount of the accuracy-related penalty is 20 percent of the portion of an underpayment of tax required to be shown on a return that is attributable to any of the types of misconduct listed in [paragraphs (a)(1) through (a)(3)](#a-1..a-3) of this section, except as provided in [paragraph (b)(2)](#b-2) of this section.
  - (2) **Increase in penalty for gross valuation misstatement.** In the case of a gross valuation misstatement, as defined in [section 6662(h)(2)](/cfr/26/6662.md?p=h-2) and [§ 1.6662-5(e)(2)](/cfr/26/1.6662-5.md?p=e-2), the amount of the accuracy-related penalty is 40 percent of the portion of an underpayment of tax required to be shown on a return that is attributable to the gross valuation misstatement, provided the applicable dollar limitation set forth in [section 6662(e)(2)](/cfr/26/6662.md?p=e-2) is satisfied.
- (c) **No stacking of accuracy-related penalty components.** The maximum accuracy-related penalty imposed on a portion of an underpayment may not exceed 20 percent of such portion (40 percent of the portion attributable to a gross valuation misstatement), notwithstanding that such portion is attributable to more than one of the types of misconduct described in [paragraph (a)](#a) of this section. For example, if a portion of an underpayment of tax required to be shown on a return is attributable both to negligence and a substantial understatement of income tax, the maximum accuracy-related penalty is 20 percent of such portion. Similarly, the maximum accuracy-related penalty imposed on any portion of an underpayment that is attributable both to negligence and a gross valuation misstatement is 40 percent of such portion.
- (d) **Effective dates—**
  - (1) **Returns due before January 1, 1994.** [Section 1.6662-3(c)](/cfr/26/1.6662-3.md?p=c) and §§ [1.6662-4 (e)](/cfr/26/1.6662-4.md?p=e) and [(f)](/cfr/26/1.6662-4.md?p=f) (relating to methods of making adequate disclosure) (as contained in [26 CFR part 1](/cfr/26/part1.md) revised April 1, 1995) apply to returns the due date of which (determined without regard to extensions of time for filing) is after December 31, 1991, but before January 1, 1994. Except as provided in the preceding sentence and in paragraphs [(d)(2)](#d-2), [(3)](#d-3), and [(4)](#d-4) of this section, [§§ 1.6662-1 through 1.6662-5](/cfr/26/1.6662-1..1.6662-5.md) apply to returns the due date of which (determined without regard to extensions of time for filing) is after December 31, 1989, but before January 1, 1994. To the extent the provisions of these regulations were not reflected in the statute as amended by the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), in Notice 90-20, 1990-1 C.B. 328, or in rules and regulations in effect prior to March 4, 1991 (to the extent not inconsistent with the statute as amended by OBRA 1989), these regulations will not be adversely applied to a taxpayer who took a position based upon such prior rules on a return filed before January 1, 1992.
  - (2) **Returns due after December 31, 1993.** Except as provided in paragraphs [(d)(3)](#d-3), [(4)](#d-4) and [(5)](#d-5) of this section and the last sentence of this [paragraph (d)(2)](#d-2), the provisions of [§§ 1.6662-1 through 1.6662-4](/cfr/26/1.6662-1..1.6662-4.md) and [§ 1.6662-7](/cfr/26/1.6662-7.md) (as revised to reflect the changes made to the accuracy-related penalty by the Omnibus Budget Reconciliation Act of 1993) and of [§ 1.6662-5](/cfr/26/1.6662-5.md) apply to returns the due date of which (determined without regard to extensions of time for filing) is after December 31, 1993. These changes include raising the disclosure standard for the penalties for disregarding rules or regulations and for a substantial understatement of income tax from not frivolous to reasonable basis, eliminating the disclosure exception for the negligence penalty, and providing guidance on the meaning of reasonable basis. The Omnibus Budget Reconciliation Act of 1993 changes relating to the penalties for negligence or disregard of rules or regulations will not apply to returns (including qualified amended returns) that are filed on or before March 14, 1994, but the provisions of [§§ 1.6662-1 through 1.6662-3](/cfr/26/1.6662-1..1.6662-3.md) (as contained in [26 CFR part 1](/cfr/26/part1.md) revised April 1, 1995) relating to those penalties will apply to such returns.
  - (3) **Special rules for tax shelter items.** Sections [1.6662-4(g)(1)](/cfr/26/1.6662-4.md?p=g-1) and [1.6662-4(g)(4)](/cfr/26/1.6662-4.md?p=g-4) apply to returns the due date of which (determined without regard to extensions of time for filing) is after September 1, 1995. Except as provided in the last sentence of this [paragraph (d)(3)](#d-3), §§ [1.6662-4(g)(1)](/cfr/26/1.6662-4.md?p=g-1) and [1.6662-4(g)(4)](/cfr/26/1.6662-4.md?p=g-4) (as contained in [26 CFR part 1](/cfr/26/part1.md) revised April 1, 1995) apply to returns the due date of which (determined without regard to extensions of time for filing) is on or before September 1, 1995 and after December 31, 1989. For transactions occurring after December 8, 1994, §§ [1.6662-4(g)(1)](/cfr/26/1.6662-4.md?p=g-1) and [1.6662-4(g)(2)](/cfr/26/1.6662-4.md?p=g-2) (as contained in [26 CFR part 1](/cfr/26/part1.md) revised April 1, 1995) are applied taking into account the changes made to [section 6662(d)(2)(C)](/cfr/26/6662.md?p=d-2-C) (relating to the substantial understatement penalty for tax shelter items of corporations) by [section 744](/cfr/26/744.md) of title VII of the Uruguay Round Agreements Act, Pub. L. 103-465 (108 Stat. 4809).
  - (4) **Special rules for reasonable basis.** [Section 1.6662-3(b)(3)](/cfr/26/1.6662-3.md?p=b-3) applies to returns filed on or after December 2, 1998.
  - (5) **For returns filed after December 31, 2002.** Sections [1.6662-3(a)](/cfr/26/1.6662-3.md?p=a), [1.6662-3(b)(2)](/cfr/26/1.6662-3.md?p=b-2) and [1.6662-3(c)(1)](/cfr/26/1.6662-3.md?p=c-1) (relating to adequate disclosure) apply to returns filed after December 31, 2002, with respect to transactions entered into on or after January 1, 2003. Except as provided in [paragraph (d)(1)](#d-1) of this section, §§ [1.6662-3(a)](/cfr/26/1.6662-3.md?p=a), [1.6662-3(b)(2)](/cfr/26/1.6662-3.md?p=b-2) and [1.6662-3(c)(1)](/cfr/26/1.6662-3.md?p=c-1) (as contained in [26 CFR part 1](/cfr/26/part1.md) revised April 1, 2003) apply to returns filed with respect to transactions entered into prior to January 1, 2003.

# §1.6662-3. Negligence or disregard of rules or regulations.

- (a) **In general.** If any portion of an underpayment, as defined in [section 6664(a)](/cfr/26/6664.md?p=a) and [§ 1.6664-2](/cfr/26/1.6664-2.md), of any income tax imposed under subtitle A of the Internal Revenue Code that is required to be shown on a return is attributable to negligence or disregard of rules or regulations, there is added to the tax an amount equal to 20 percent of such portion. The penalty for disregarding rules or regulations does not apply, however, if the requirements of [paragraph (c)(1)](#c-1) of this section are satisfied and the position in question is adequately disclosed as provided in [paragraph (c)(2)](#c-2) of this section (and, if the position relates to a reportable transaction as defined in [§ 1.6011-4(b)](/cfr/26/1.6011-4.md?p=b) (or [§ 1.6011-4T(b)](/cfr/26/1.6011-4T.md?p=b), as applicable), the transaction is disclosed in accordance with [§ 1.6011-4](/cfr/26/1.6011-4.md) (or [§ 1.6011-4T](/cfr/26/1.6011-4T.md), as applicable)), or to the extent that the reasonable cause and good faith exception to this penalty set forth in [§ 1.6664-4](/cfr/26/1.6664-4.md) applies. In addition, if a position with respect to an item (other than with respect to a reportable transaction, as defined in [§ 1.6011-4(b)](/cfr/26/1.6011-4.md?p=b) or [§ 1.6011-4T(b)](/cfr/26/1.6011-4T.md?p=b), as applicable) is contrary to a revenue ruling or notice (other than a notice of proposed rulemaking) issued by the Internal Revenue Service and published in the Internal Revenue Bulletin (see [§ 601.601(d)(2)](/cfr/26/601.601.md?p=d-2) of this chapter), this penalty does not apply if the position has a realistic possibility of being sustained on its merits. See [§ 1.6694-2(b)](/cfr/26/1.6694-2.md?p=b) of the income tax return preparer penalty regulations for a description of the realistic possibility standard.
- (b) **Definitions and rules—**
  - (1) **Negligence.** The term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. “Negligence” also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. A return position that has a reasonable basis as defined in [paragraph (b)(3)](#b-3) of this section is not attributable to negligence. Negligence is strongly indicated where—
    - (i) A taxpayer fails to include on an income tax return an amount of income shown on an information return, as defined in [section 6724(d)(1)](/cfr/26/6724.md?p=d-1);
    - (ii) A taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion on a return which would seem to a reasonable and prudent person to be “too good to be true” under the circumstances;
    - (iii) A partner fails to comply with the requirements of [section 6222](/cfr/26/6222.md), which requires that a partner treat partnership items on its return in a manner that is consistent with the treatment of such items on the partnership return (or notify the Secretary of the inconsistency); or
    - (iv) A shareholder fails to comply with the requirements of [section 6242](/cfr/26/6242.md), which requires that an S corporation shareholder treat subchapter S items on its return in a manner that is consistent with the treatment of such items on the corporation's return (or notify the Secretary of the inconsistency).
  - (2) **Disregard of rules or regulations.** The term disregard includes any careless, reckless or intentional disregard of rules or regulations. The term “rules or regulations” includes the provisions of the Internal Revenue Code, temporary or final Treasury regulations issued under the Code, and revenue rulings or notices (other than notices of proposed rulemaking) issued by the Internal Revenue Service and published in the Internal Revenue Bulletin. A disregard of rules or regulations is “careless” if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. A disregard is “reckless” if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe. A disregard is “intentional” if the taxpayer knows of the rule or regulation that is disregarded. Nevertheless, a taxpayer who takes a position (other than with respect to a reportable transaction, as defined in [§ 1.6011-4(b)](/cfr/26/1.6011-4.md?p=b) or [§ 1.6011-4T(b)](/cfr/26/1.6011-4T.md?p=b), as applicable) contrary to a revenue ruling or notice has not disregarded the ruling or notice if the contrary position has a realistic possibility of being sustained on its merits.
  - (3) **Reasonable basis.** Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. If a return position is reasonably based on one or more of the authorities set forth in [§ 1.6662-4(d)(3)(iii)](/cfr/26/1.6662-4.md?p=d-3-iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard even though it may not satisfy the substantial authority standard as defined in [§ 1.6662-4(d)(2)](/cfr/26/1.6662-4.md?p=d-2). (See [§ 1.6662-4(d)(3)(ii)](/cfr/26/1.6662-4.md?p=d-3-ii) for rules with respect to relevance, persuasiveness, subsequent developments, and use of a well-reasoned construction of an applicable statutory provision for purposes of the substantial understatement penalty.) In addition, the reasonable cause and good faith exception in [§ 1.6664-4](/cfr/26/1.6664-4.md) may provide relief from the penalty for negligence or disregard of rules or regulations, even if a return position does not satisfy the reasonable basis standard.
- (c) **Exception for adequate disclosure—**
  - (1) **In general.** No penalty under [section 6662(b)(1)](/cfr/26/6662.md?p=b-1) may be imposed on any portion of an underpayment that is attributable to a position contrary to a rule or regulation if the position is disclosed in accordance with the rules of [paragraph (c)(2)](#c-2) of this section (and, if the position relates to a reportable transaction as defined in [§ 1.6011-4(b)](/cfr/26/1.6011-4.md?p=b) (or [§ 1.6011-4T(b)](/cfr/26/1.6011-4T.md?p=b), as applicable), the transaction is disclosed in accordance with [§ 1.6011-4](/cfr/26/1.6011-4.md) (or [§ 1.6011-4T](/cfr/26/1.6011-4T.md), as applicable)) and, in case of a position contrary to a regulation, the position represents a good faith challenge to the validity of the regulation. This disclosure exception does not apply, however, in the case of a position that does not have a reasonable basis or where the taxpayer fails to keep adequate books and records or to substantiate items properly.
  - (2) **Method of disclosure.** Disclosure is adequate for purposes of the penalty for disregarding rules or regulations if made in accordance with the provisions of §§ [1.6662-4(f)(1)](/cfr/26/1.6662-4.md?p=f-1), [(3)](/cfr/26/1.6662-4.md?p=f-3), [(4)](/cfr/26/1.6662-4.md?p=f-4), and [(5)](/cfr/26/1.6662-4.md?p=f-5), which permit disclosure on a properly completed and filed Form 8275 or 8275-R, as appropriate. In addition, the statutory or regulatory provision or ruling in question must be adequately identified on the Form 8275 or 8275-R, as appropriate. The provisions of [§ 1.6662-4(f)(2)](/cfr/26/1.6662-4.md?p=f-2), which permit disclosure in accordance with an annual revenue procedure for purposes of the substantial understatement penalty, do not apply for purposes of this section.
- (d) **Special rules in the case of carrybacks and carryovers—**
  - (1) **In general.** The penalty for negligence or disregard of rules or regulations applies to any portion of an underpayment for a year to which a loss, deduction or credit is carried, which portion is attributable to negligence or disregard of rules or regulations in the year in which the carryback or carryover of the loss, deduction or credit arises (the “loss or credit year”).
  - (2) **Transition rule for carrybacks to pre-1990 years.** A 20 percent penalty under [section 6662(b)(1)](/cfr/26/6662.md?p=b-1) is imposed on any portion of an underpayment for a carryback year, the return for which is due (without regard to extensions) before January 1, 1990, if—
    - (i) That portion is attributable to negligence or disregard of rules or regulations in a loss or credit year; and
    - (ii) **The return for the loss or credit year is due (without regard to extensions) after December 31, 1989.**
  - (3) **Example.** The following example illustrates the provisions of [paragraph (d)](#d) of this section. This example does not take into account the reasonable cause exception under [§ 1.6664-4](/cfr/26/1.6664-4.md).