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What to Know About the IRS Accuracy-Related Penalty

Published on: Published in: Tax Industry

If you’ve ever been surprised by an IRS penalty, you’re not alone. One of the most common is the accuracy-related penalty for a substantial understatement of tax. It’s important to understand what triggers it — and how even an honest mistake can lead to it.

What Is It?

The IRS may assess this penalty when the tax on your return is significantly lower than what you actually owe. This applies if the difference (understatement) is more than the greater of:

  • 10% of your correct tax
  • $5,000 (for individuals)

If it meets that threshold, the penalty is 20% of the understated amount.

Example: Understanding the Threshold

Correct Tax $28,000
Reported Tax $22,000
Understated Amount $6,000
10% of Correct Tax $2,800
Fixed Threshold $5,000
Greater of the Two $5,000
Penalty Applies? Yes
Penalty Amount 20% of $6,000 = $1,200
  • Important: If your understatement had only been $3,000, that would be more than 10%, but not more than $5,000, so the penalty would not apply.

Does the IRS Penalize Honest Mistakes?

Unfortunately, yes. The IRS does not waive this penalty just because:

  • You didn’t receive a tax form
  • You moved and missed a document
  • You made an honest oversight

The IRS bases penalties on what they received — not what made it to your mailbox. That’s why it’s so important to review your return against IRS records and ensure all required documents are included.

How to Prevent or Minimize It

  • File an Amended Return Early: If you discover a mistake before the IRS does, filing an amended return (Form 1040-X) can often help avoid the penalty.
  • Match What the IRS Has: Your tax professional can help pull IRS wage & income transcripts to confirm nothing was missed.
  • Document and Disclose: If you’re taking a position the IRS may challenge, disclosure and proper support (like Form 8275) can help you avoid penalties.

Final Thoughts

The accuracy-related penalty can be costly, even if your intentions were good. But with a little extra diligence and support, you can protect yourself.
Key takeaway: Double-check your return against IRS records, act quickly if something was missed, and know that fixing it early makes a big difference.

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