§6662 — Title 26 Internal Revenue Code | U.S. Code

§6662 Imposition of accuracy-related penalty on underpayments

Title 26 › Subtitle Subtitle F— - Procedure and Administration › Chapter CHAPTER 68— - ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES › Subchapter Subchapter A— - Additions to the Tax and Additional Amounts › Part PART II— - ACCURACY-RELATED AND FRAUD PENALTIES › § 6662

Last updated Apr 6, 2026|Official source

Summary

If you underpay your taxes for a reason listed in the law, the IRS adds a penalty equal to 20% of the underpaid amount that fits those reasons. Some kinds of mistakes or hidden items make the penalty bigger: 40% in certain serious cases and 50% for a specific charity deduction overstatement. The rule covers things like being negligent or ignoring rules; a big understatement of tax; big wrong values for property or transfer prices; big overstatements of pension liabilities; big undervaluing for estate or gift taxes; transactions that lack real economic substance; undisclosed foreign financial assets; failing to use the right estate basis rule; and some charity deduction disallowances. “Negligence” means not making a reasonable effort to follow the tax rules. A “substantial understatement” normally means you underreported more than the greater of 10% of the tax shown or $5,000. For most corporations (not S corps or certain personal holding companies) the test is the lesser of (10% of tax or $10,000 if larger) and $10,000,000. If you claim the section 199A deduction, the percent test is 5% instead of 10%. Some understatements are reduced if you had substantial authority or you properly disclosed the item and had a reasonable basis. Valuation, pension, and estate/gift errors have their own percentage cutoffs and minimum-dollar thresholds ($5,000 or $10,000, $1,000, etc.). Nondisclosed noneconomic-substance transactions and undisclosed foreign financial assets (those you were required to report under sections 6038, 6038B, 6038D, 6046A, or 6048 but did not) bring a 40% penalty. You generally cannot avoid the higher penalty by fixing the return after the IRS first contacts you. For disallowed certain energy credits, the “substantial understatement” test uses 1% instead of 10%.

Title 26, §6662

Internal Revenue Code — Source: USLM XML via OLRC

(a)If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.

(b)This section shall apply to the portion of any underpayment which is attributable to 1 or more of the following:

(1)Negligence or disregard of rules or regulations.

(2)Any substantial understatement of income tax.

(3)Any substantial valuation misstatement under chapter 1.

(4)Any substantial overstatement of pension liabilities.

(5)Any substantial estate or gift tax valuation understatement.

(6)Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law.

(7)Any undisclosed foreign financial asset understatement.

(8)Any inconsistent estate basis.

(9)Any overstatement of the deduction provided in section 170(p).

(10)Any disallowance of a deduction by reason of section 170(h)(7).

(c)For purposes of this section, the term “negligence” includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term “disregard” includes any careless, reckless, or intentional disregard.

(d)(1)(A)For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of—

(i)10 percent of the tax required to be shown on the return for the taxable year, or

(ii)$5,000.

(B)In the case of a corporation other than an S corporation or a personal holding company (as defined in section 542), there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the lesser of—

(i)10 percent of the tax required to be shown on the return for the taxable year (or, if greater, $10,000), or

(ii)$10,000,000.

(C)In the case of any taxpayer who claims any deduction allowed under section 199A for the taxable year, subparagraph (A) shall be applied by substituting “5 percent” for “10 percent”.

(2)(A)For purposes of paragraph (1), the term “understatement” means the excess of—

(i)the amount of the tax required to be shown on the return for the taxable year, over

(ii)the amount of the tax imposed which is shown on the return, reduced by any rebate (within the meaning of section 6211(b)(2)).

(B)The amount of the understatement under subparagraph (A) shall be reduced by that portion of the understatement which is attributable to—

(i)the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment, or

(ii)any item if—

(I)the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return, and

(II)there is a reasonable basis for the tax treatment of such item by the taxpayer.

(C)(i)Subparagraph (B) shall not apply to any item attributable to a tax shelter.

(ii)For purposes of clause (i), the term “tax shelter” means—

(I)a partnership or other entity,

(II)any investment plan or arrangement, or

(III)any other plan or arrangement,

(3)The Secretary may prescribe a list of positions which the Secretary believes do not meet 1 or more of the standards specified in paragraph (2)(B)(i), section 6664(d)(3), and section 6694(a)(1). Such list (and any revisions thereof) shall be published in the Federal Register or the Internal Revenue Bulletin.

(e)(1)For purposes of this section, there is a substantial valuation misstatement under chapter 1 if—

(A)the value of any property (or the adjusted basis of any property) claimed on any return of tax imposed by chapter 1 is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be), or

(B)(i)the price for any property or services (or for the use of property) claimed on any such return in connection with any transaction between persons described in section 482 is 200 percent or more (or 50 percent or less) of the amount determined under section 482 to be the correct amount of such price, or

(ii)the net section 482 transfer price adjustment for the taxable year exceeds the lesser of $5,000,000 or 10 percent of the taxpayer’s gross receipts.

(2)No penalty shall be imposed by reason of subsection (b)(3) unless the portion of the underpayment for the taxable year attributable to substantial valuation misstatements under chapter 1 exceeds $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company (as defined in section 542)).

(3)For purposes of this subsection—

(A)The term “net section 482 transfer price adjustment” means, with respect to any taxable year, the net increase in taxable income for the taxable year (determined without regard to any amount carried to such taxable year from another taxable year) resulting from adjustments under section 482 in the price for any property or services (or for the use of property).

(B)For purposes of determining whether the threshold requirements of paragraph (1)(B)(ii) are met, the following shall be excluded:

(i)Any portion of the net increase in taxable income referred to in subparagraph (A) which is attributable to any redetermination of a price if—

(I)it is established that the taxpayer determined such price in accordance with a specific pricing method set forth in the regulations prescribed under section 482 and that the taxpayer’s use of such method was reasonable,

(II)the taxpayer has documentation (which was in existence as of the time of filing the return) which sets forth the determination of such price in accordance with such a method and which establishes that the use of such method was reasonable, and

(III)the taxpayer provides such documentation to the Secretary within 30 days of a request for such documentation.

(ii)Any portion of the net increase in taxable income referred to in subparagraph (A) which is attributable to a redetermination of price where such price was not determined in accordance with such a specific pricing method if—

(I)the taxpayer establishes that none of such pricing methods was likely to result in a price that would clearly reflect income, the taxpayer used another pricing method to determine such price, and such other pricing method was likely to result in a price that would clearly reflect income,

(II)the taxpayer has documentation (which was in existence as of the time of filing the return) which sets forth the determination of such price in accordance with such other method and which establishes that the requirements of subclause (I) were satisfied, and

(III)the taxpayer provides such documentation to the Secretary within 30 days of request for such documentation.

(iii)Any portion of such net increase which is attributable to any transaction solely between foreign corporations unless, in the case of any such corporations, the treatment of such transaction affects the determination of income from sources within the United States or taxable income effectively connected with the conduct of a trade or business within the United States.

(C)If the regular tax (as defined in section 55(c)) imposed by chapter 1 on the taxpayer is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of this paragraph.

(D)For purposes of section 6664(c) the taxpayer shall not be treated as having reasonable cause for any portion of an underpayment attributable to a net section 482 transfer price adjustment unless such taxpayer meets the requirements of clause (i), (ii), or (iii) of subparagraph (B) with respect to such portion.

(f)(1)For purposes of this section, there is a substantial overstatement of pension liabilities if the actuarial determination of the liabilities taken into account for purposes of computing the deduction under paragraph (1) or (2) of section 404(a) is 200 percent or more of the amount determined to be the correct amount of such liabilities.

(2)No penalty shall be imposed by reason of subsection (b)(4) unless the portion of the underpayment for the taxable year attributable to substantial overstatements of pension liabilities exceeds $1,000.

(g)(1)For purposes of this section, there is a substantial estate or gift tax valuation understatement if the value of any property claimed on any return of tax imposed by subtitle B is 65 percent or less of the amount determined to be the correct amount of such valuation.

(2)No penalty shall be imposed by reason of subsection (b)(5) unless the portion of the underpayment attributable to substantial estate or gift tax valuation understatements for the taxable period (or, in the case of the tax imposed by chapter 11, with respect to the estate of the decedent) exceeds $5,000.

(h)(1)To the extent that a portion of the underpayment to which this section applies is attributable to one or more gross valuation misstatements, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.

(2)The term “gross valuation misstatements” means—

(A)any substantial valuation misstatement under chapter 1 as determined under subsection (e) by substituting—

(i)in paragraph (1)(A), “200 percent” for “150 percent”,

(ii)in paragraph (1)(B)(i)—

(I)“400 percent” for “200 percent”, and

(II)“25 percent” for “50 percent”, and

(iii)in paragraph (1)(B)(ii)—

(I)“$20,000,000” for “$5,000,000”, and

(II)“20 percent” for “10 percent”.

(B)any substantial overstatement of pension liabilities as determined under subsection (f) by substituting “400 percent” for “200 percent”,

(C)any substantial estate or gift tax valuation understatement as determined under subsection (g) by substituting “40 percent” for “65 percent”, and

(D)any disallowance of a deduction described in subsection (b)(10).

(i)(1)In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.

(2)For purposes of this subsection, the term “nondisclosed noneconomic substance transaction” means any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return.

(3)In no event shall any amendment or supplement to a return of tax be taken into account for purposes of this subsection if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary.

(j)(1)For purposes of this section, the term “undisclosed foreign financial asset understatement” means, for any taxable year, the portion of the understatement for such taxable year which is attributable to any transaction involving an undisclosed foreign financial asset.

(2)For purposes of this subsection, the term “undisclosed foreign financial asset” means, with respect to any taxable year, any asset with respect to which information was required to be provided under section 6038, 6038B, 6038D, 6046A, or 6048 for such taxable year but was not provided by the taxpayer as required under the provisions of those sections.

(3)In the case of any portion of an underpayment which is attributable to any undisclosed foreign financial asset understatement, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.

(k)For purposes of this section, the term “inconsistent estate basis” means any portion of an underpayment attributable to the failure to comply with section 1014(f).

(l)In the case of any portion of an underpayment which is attributable to one or more overstatements of the deduction provided in section 170(p), subsection (a) shall be applied with respect to such portion by substituting “50 percent” for “20 percent”.

(m)(1)In the case of a taxpayer for which there is a disallowance of an applicable energy credit for any taxable year, for purposes of determining whether there is a substantial understatement of income tax for such taxable year, subsection (d)(1) shall be applied—

(A)in subparagraphs (A) and (B), by substituting “1 percent” for “10 percent” each place it appears, and

(B)without regard to subparagraph (C).

(2)For purposes of this subsection, the term “disallowance of an applicable energy credit” means the disallowance of a credit under section 45X, 45Y, or 48E by reason of overstating the material assistance cost ratio (as determined under section 7701(a)(52)) with respect to any qualified facility, energy storage technology, or facility which produces eligible components.

Notes & Related Subsidiaries

Editorial Notes

Codification Another section 212(b) of div. EE of Pub. L. 116–260 amended section 63 of this title. section 1409(b)(1), (2) of Pub. L. 111–152, which directed the amendment of section 6662 without specifying the act to be amended, was executed to this section, which is section 6662 of the Internal Revenue Code of 1986, to reflect the probable intent of Congress. See 2010 Amendment notes below. section 1219(a)(1), (2) of Pub. L. 109–280, which directed the amendment of section 6662 without specifying the act to be amended, was executed to this section, which is section 6662 of the Internal Revenue Code of 1986, to reflect the probable intent of Congress. See 2006 Amendment notes below.

Prior Provisions

A prior section 6662, acts Aug. 16, 1954, ch. 736, 68A Stat. 827, § 6659; May 14, 1960, Pub. L. 86–470, § 1, 74 Stat. 132; Dec. 30, 1969, Pub. L. 91–172, title I, § 101(j)(51), 83 Stat. 531; Sept. 2, 1974, Pub. L. 93–406, title II, § 1016(a)(19), 88 Stat. 931; renumbered § 6660, Aug. 13, 1981, Pub. L. 97–34, title VII, § 722(a)(1), 95 Stat. 341; renumbered § 6662, Sept. 3, 1982, Pub. L. 97–248, title III, § 323(a), 96 Stat. 613, directed that additions be treated as tax and set procedure for assessing certain additions to tax, prior to repeal by Pub. L. 101–239, title VII, § 7721(a), Dec. 19, 1989, 103 Stat. 2395, applicable to returns the due date for which (determined without regard to extensions) is after Dec. 31, 1989. See section 6665 of this title.

Amendments

2025—Subsec. (m). Pub. L. 119–21 added subsec. (m). 2022—Subsec. (b)(10). Pub. L. 117–328, § 605(a)(2)(A), added par. (10). Subsec. (h)(2)(D). Pub. L. 117–328, § 605(a)(2)(B), added subpar. (D). 2020—Subsec. (b)(9). Pub. L. 116–260, § 212(b)(1), added par. (9). Subsec. (l). Pub. L. 116–260, § 212(b)(2), added subsec. (l). 2018—Subsec. (d)(1)(C). Pub. L. 115–141, § 101(a)(2)(A), substituted “any deduction” for “the deduction”. Subsec. (d)(3). Pub. L. 115–141, § 401(a)(303), substituted “section 6664(d)(3)” for “section 6664(d)(2)”. Subsecs. (i), (j). Pub. L. 115–141, § 401(a)(304), transferred subsec. (i) to appear before subsec. (j). Subsec. (k). Pub. L. 115–141, § 104(a), amended subsec. (k) generally. Prior to amendment, text read as follows: “For purposes of this section, there is an ‘inconsistent estate basis’ if the basis of property claimed on a return exceeds the basis as determined under section 1014(f).” 2017—Subsec. (d)(1)(C). Pub. L. 115–97 added subpar. (C). 2015—Subsec. (b)(8). Pub. L. 114–41, § 2004(c)(1), added par. (8). Subsec. (k). Pub. L. 114–41, § 2004(c)(2), added subsec. (k). 2014—Subsec. (b)(7). Pub. L. 113–295, § 208(a), amended directory language of Pub. L. 111–147, § 512(a)(1). See 2010 Amendment note below. 2010—Subsec. (b)(6). Pub. L. 111–152, § 1409(b)(1), added par. (6). See Codification note above. Subsec. (b)(7). Pub. L. 111–147, § 512(a)(1), as amended by Pub. L. 113–295, § 208(a), added par. (7). Subsec. (i). Pub. L. 111–152, § 1409(b)(2), added subsec. (i). See Codification note above. Subsec. (j). Pub. L. 111–147, § 512(a)(2), added subsec. (j). 2006—Subsec. (e)(1)(A). Pub. L. 109–280, § 1219(a)(1)(A), substituted “150 percent” for “200 percent”. See Codification note above. Subsec. (g)(1). Pub. L. 109–280, § 1219(a)(1)(B), substituted “65 percent” for “50 percent”. See Codification note above. Subsec. (h)(2)(A)(i), (ii). Pub. L. 109–280, § 1219(a)(2)(A), amended cls. (i) and (ii) generally. Prior to amendment, cls. (i) and (ii) read as follows: “(i) ‘400 percent’ for ‘200 percent’ each place it appears, “(ii) ‘25 percent’ for ‘50 percent’, and”. See Codification note above. Subsec. (h)(2)(C). Pub. L. 109–280, § 1219(a)(2)(B), substituted “ ‘40 percent’ for ‘65 percent’ ” for “ ‘25 percent’ for ‘50 percent’ ”. See Codification note above. 2005—Subsec. (b). Pub. L. 109–135, § 403(x)(1), inserted at end “Except as provided in paragraph (1) or (2)(B) of section 6662A(e), this section shall not apply to the portion of any underpayment which is attributable to a reportable transaction understatement on which a penalty is imposed under section 6662A.” Subsec. (d)(3). Pub. L. 109–135, § 412(aaa), struck out “the” before “1 or more”. 2004—Pub. L. 108–357, § 812(e)(1), inserted “on underpayments” after “penalty” in section catchline. Subsec. (d)(1)(B). Pub. L. 108–357, § 819(a), reenacted heading without change and amended text of subpar. (B) generally. Prior to amendment, text read as follows: “In the case of a corporation other than an S corporation or a personal holding company (as defined in section 542), paragraph (1) shall be applied by substituting ‘$10,000’ for ‘$5,000’.” Subsec. (d)(2)(A). Pub. L. 108–357, § 812(b), inserted concluding provisions. Subsec. (d)(2)(C). Pub. L. 108–357, § 812(d), amended subpar. (C) generally, substituting provisions relating to inapplicability of subpar. (B) to any item attributable to a tax shelter and defining the term “tax shelter” for provisions relating to, in the case of any item of a taxpayer other than a corporation which is attributable to a tax shelter, inapplicability of subpar. (B)(ii) and inapplicability of subpar. (B)(i), unless the taxpayer reasonably believed that the tax treatment of such item by the taxpayer was more likely than not the proper treatment, inapplicability of subpar. (B) to any item of a corporation which is attributable to a tax shelter, and provisions defining the term “tax shelter”. Subsec. (d)(2)(D). Pub. L. 108–357, § 819(b)(2), struck out heading and text of subpar. (D). Text read as follows: “The Secretary shall prescribe (and revise not less frequently than annually) a list of positions— “(i) for which the Secretary believes there is not substantial authority, and “(ii) which affect a significant number of taxpayers. Such list (and any revision thereof) shall be published in the Federal Register.” Subsec. (d)(3). Pub. L. 108–357, § 819(b)(1), added par. (3). 1997—Subsec. (d)(2)(B). Pub. L. 105–34, § 1028(c)(1), inserted concluding provisions. Subsec. (d)(2)(C)(iii). Pub. L. 105–34, § 1028(c)(2), substituted “a significant purpose” for “the principal purpose” in concluding provisions. 1994—Subsec. (d)(2)(C)(i). Pub. L. 103–465, § 744(b)(1), substituted “In the case of any item of a taxpayer other than a corporation which is” for “In the case of any item” in introductory provisions. Subsec. (d)(2)(C)(ii). Pub. L. 103–465, § 744(a), added cl. (ii). Former cl. (ii) redesignated (iii). Subsec. (d)(2)(C)(iii). Pub. L. 103–465, § 744(a), (b)(2), redesignated cl. (ii) as (iii) and substituted “this subparagraph” for “clause (i)” in introductory provisions. 1993—Subsec. (d)(2)(B)(ii). Pub. L. 103–66, § 13251(a), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “any item with respect to which the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return.” Subsec. (e)(1)(B)(ii). Pub. L. 103–66, § 13236(a), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “the net section 482 transfer price adjustment for the taxable year exceeds $10,000,000.” Subsec. (e)(3)(B). Pub. L. 103–66, § 13236(b), amended heading and text of subpar. (B) generally. Prior to amendment, text read as follows: “For purposes of determining whether the $10,000,000 threshold requirement of paragraph (1)(B)(ii) is met, there shall be excluded— “(i) any portion of the net increase in taxable income referred to in subparagraph (A) which is attributable to any redetermination of a price if it is shown that there was a reasonable cause for the taxpayer’s determination of such price and that the taxpayer acted in good faith with respect to such price, and “(ii) any portion of such net increase which is attributable to any transaction solely between foreign corporations unless, in the case of any of such corporations, the treatment of such transaction affects the determination of income from sources within the United States or taxable income effectively connected with the conduct of a trade or business within the United States.” Subsec. (e)(3)(D). Pub. L. 103–66, § 13236(c), added subpar. (D). Subsec. (h)(2)(A)(iii). Pub. L. 103–66, § 13236(d), amended cl. (iii) generally. Prior to amendment, cl. (iii) read as follows: “ ‘$20,000,000’ for ‘$10,000,000’,”. 1990—Subsec. (b)(3). Pub. L. 101–508, § 11312(b)(1), amended par. (3) generally, substituting “misstatement” for “overstatement”. Subsec. (e). Pub. L. 101–508, § 11312(a), substituted “misstatement” for “overstatement” in heading and amended text generally. Prior to amendment, text read as follows: “(1) In general.—For purposes of this section, there is a substantial valuation overstatement under chapter 1 if the value of any property (or the adjusted basis of any property) claimed on any return of tax imposed by chapter 1 is 200 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be). “(2) Limitation.—No penalty shall be imposed by reason of subsection (b)(3) unless the portion of the underpayment for the taxable year attributable to substantial valuation overstatements under chapter 1 exceeds $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company (as defined in section 542)).” Subsec. (h)(2)(A). Pub. L. 101–508, § 11312(b)(2), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “any substantial valuation overstatement under chapter 1 as determined under subsection (e) by substituting ‘400 percent’ for ‘200 percent’,”.

Amendments

made by this section [amending this section] shall apply to taxable years ending after the date of the enactment of this Act [Nov. 5, 1990].”

Effective Date

Section applicable to returns the due date for which (determined without regard to extensions) is after Dec. 31, 1989, see section 7721(d) of Pub. L. 101–239, set out as an

Effective Date

of 1989 Amendment note under section 461 of this title.

§6662 Imposition of accuracy-related penalty on underpayments

Summary

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