The Accuracy-Related Penalty & The Reasonable Cause Exception

The accuracy-related penalty shows up more often than any other tax penalty, and when it does, it adds 20% to an already troublesome tax bill. Most assume there's nothing they can do about it.

That assumption is wrong...if you have reasonable cause, but proving reasonable cause is not easy. And it's litigated a lot. The IRS wins most of the time. Still, some taxpayers are able to convince the court to remove it.

Let's discuss the four realities that consistently determine whether courts waive the accuracy-related penalty based on reasonable cause.

1. This is the most litigated tax penalty—and the IRS usually wins

The accuracy-related penalty under Section 6662 doesn’t require fraud, deception, or intent. It applies to understatements due to negligence but also applies to, just generally, substantial understatements along with valuation errors and disallowed tax benefits, among other things.

That low bar is why it’s used so often and why courts have seen hundreds of these cases recently. The IRS does win most of the time but it's important to understand how to position yourself to win.

Taxpayers often focus on whether their position was “reasonable.” Courts focus on something else entirely, though: whether the taxpayer can show they qualify for the reasonable-cause exception—and whether the record supports it.

That’s a very different fight.

2. Reasonable cause is a facts-and-circumstances test—and effort carries the most weight

Courts continue to say this over and over again: The most important factor is the taxpayer’s effort to determine the proper tax liability.

Courts are focused on the taxpayer's intentions, not on how confused they were or how overwhelming the tax law was.

The courts look at behavior:

• Did the taxpayer take a closer look when something didn’t make sense?

• Did they fix their return based on missing or inconsistent information returns?

• Did they ask follow-up questions—or assume someone else had it handled?

• Did they maintain records as they went, or try to recreate them later?

Even when taxpayers are wrong, they can still avoid the penalty. But taxpayers who appear passive - who didn't do the work to figure out how much income they made and how much they owed - wont get the benefit of the doubt.

It’s about whether the taxpayer took ownership of the process.

3. Reliance on professional advice helps—but only under a very specific framework

Many taxpayers assume that involving a tax professional automatically protects them. Courts have been clear: it doesn’t.

When reliance on professional advice is raised as part of a reasonable-cause argument, courts apply a three-part analysis:

• Was the adviser competent to give the advice?

• Did the taxpayer provide complete and accurate information?

• Did the taxpayer actually rely on the advice in good faith?

There's also an important distinction: preparing a return is not the same as giving advice. Signing off on a return - or potentially, just feeding numbers into software - doesn’t establish that judgment or analysis occurred.

Courts look for evidence of reasoning, discussion, and decision-making. They also take note at outcomes that seem “too good to be true,” especially when sophisticated taxpayers claim they had no idea it wasn't legit

Reliance on a tax professional works when the taxpayer can show they fully disclosed accurate information and followed advice they genuinely believed was correct.

4. The strongest defenses are built before the return is filed—not during the audit

The taxpayers who successfully avoid the accuracy-related penalty tend to have one thing in common: they didn’t try to build their case after the fact.

They kept records while they were preparing their return. They documented advice received and decisions made. They filed missing returns or fixed incorrect information returns proactively. They took notes about complex or unsettled tax issues.

Courts are skeptical of documentation that appears only once the IRS gets involved. Records assembled after or during the audit are rarely enough.

For professionals helping clients file returns or plan transactions—this is where the court finds proof that an accuracy-related penalty should be excused due to reasonable cause. Once a return is filed without anything to back it up, the reasonable-cause argument usually fails.

TL;DR

⏩ The accuracy-related penalty is the most litigated tax penalty, and the IRS usually wins

⏩ The only realistic way of getting out of it is qualifying for the reasonable-cause exception.

⏩ Courts care most about the taxpayer’s effort, not their intent

⏩ Reliance on professional advice only works if it meets a certain guidelines

⏩ The best defenses are built before filing, not after the IRS shows up

➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.

Contact Me Here: https://www.weisberg.tax/contact-1

Email: sweisberg@wtaxattorney.com

Phone/Text: (248) 971-0885

Address: 300 Galleria Officentre, Suite 402, Southfield, MI 48034