Tax Court - “Amount of tax” for accuracy-related penalty 

November 18: The U.S. Tax Court in a “reviewed opinion” today held that in a case of an underpayment of tax due to negligence or a substantial understatement of income tax, the term “underpayment” in part refers to the amount shown as tax by the taxpayer on the income tax return. Thus, for purposes of determining an accuracy-related penalty, the amount of tax on the return may take into account certain credits, but cannot be reduced below zero. Rand v. Commissioner, 141 T.C. No. 12 (November 18, 2013)

Read the Tax Court majority opinion and dissenting opinions: Rand [PDF 225 KB]


Individual taxpayers filed a joint return for 2008, but improperly claimed three refundable credits (an earned income credit, an additional child tax credit, and a recovery rebate credit). They claimed and received a tax refund of over $7,300; however, it was subsequently agreed that the correct tax liability was $144.

The IRS asserted the 20% penalty applied to $7,300. The dispute in this case was how was the accuracy-related penalty to be calculated—i.e., what would be the amount shown as the tax on the return?

The majority opinion concluded that the credits in this case may be taken into account to determine the amount of tax, but that the credits cannot reduce the amount shown as tax below zero.

KPMG observation

While this case concerns individual taxpayers and tax credits only available for individuals, it is conceivable that the IRS might consider that today’s opinion has applications for corporate taxpayers.

For instance, could the majority opinion be applied with respect to the penalty that is imposed under section 6676 for an erroneous claim for refund for a corporate taxpayer that receives a refundable credit in excess of its tax liability?

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