Modifications of Substantial Understatement Penalty for Nonreportable Transactions

Before the AJCA, a 20% accuracy-related penalty applied to any substantial tax understatement. A substantial understatement existed if the correct income tax liability for a tax year exceeded that reported by the taxpayer by the greater of 10% of the correct tax or $5,000 ($10,000 in the case of most corporations); see Sec. 6662(a) and (d)(1)(A).

New Law

AJCA Section 819 modifies the Sec. 6662 definition of substantial for corporate taxpayers, to provide that there is a substantial understatement when the amount of the understatement for the tax year exceeds the lesser of 10% of the correct tax (or, if greater, $10,000) or $10 million.

Effective Date

The provision is effective for tax years beginning after Oct. 22, 2004.

From Paul Manning, Washington, DC