negligence penalty is not automatic

Published On: 29th February 2012

Sat through another federal audit where the examiner explained that the negligence penalty under I.R.C. §6662 is a “compliance penalty”, applicable to every case except where the taxpayer disproves it.  It is worth noting that the initial burden for showing a basis for the penalty is on the IRS, not on the taxpayer.  I.R.C. §7491(c).  And it is better in this area to ignore the I.R.C. §6662 regulations, which go on for pages on the definition of negligence, and focus on some wise words of the Tax Court over the years:  the penalty generally does not apply where an adjustment results from “an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge and education of the taxpayer.”  Remy v. Commissioner, T.C.Memo. 1997-72.