What counts as a substantial understatement of tax?

For individuals, a substantial understatement exists if the understated tax exceeds the greater of: (1) 10% of the tax required to be shown on your return, or (2) $5,000. For example, if your correct tax is $60,000 and you reported $50,000, your understatement is $10,000 — which exceeds both 10% of $60,000 ($6,000) and $5,000, so the substantial understatement penalty applies. For corporations (other than S corporations), the threshold is the lesser of 10% of the correct tax or $10,000,000.

Can the accuracy-related penalty be removed?

Yes. The accuracy-related penalty does not apply if you can show you acted with reasonable cause and in good faith. Common defenses include relying on the written advice of a qualified tax professional (though the reliance must have been reasonable), having substantial authority for a tax position, adequately disclosing the position on your return, or showing you kept proper records and made a good-faith effort to comply.

Can you be hit with both the accuracy-related penalty and the failure-to-file penalty on the same amount?

The accuracy-related penalty only applies to returns that have been filed. If you did not file a return, the failure-to-file penalty applies instead — the accuracy-related penalty requires an actual filed return for the IRS to compare against. Additionally, the IRS cannot stack the accuracy-related penalty and the fraud penalty on the same portion of underpayment — the fraud penalty (75%) replaces the accuracy penalty (20%) when fraud is proven.

What is the accuracy-related penalty?