What is the IRS accuracy-related penalty and how do I fight it?

The accuracy-related penalty (IRC Section 6662) is 20% of the underpayment of tax attributable to: negligence or disregard of rules, substantial understatement of income tax (more than the greater of $5,000 or 10% of the tax required to be shown), substantial valuation misstatement, or transaction lacking economic substance. This penalty is separate from failure-to-file and failure-to-pay penalties and can add significantly to your tax bill. To fight the accuracy-related penalty, you can demonstrate: reasonable cause and good faith (you made an honest mistake based on reasonable interpretation of tax law), reliance on professional advice (you followed your CPA's or EA's recommendations in good faith), adequate disclosure (you disclosed the position on your return using Form 8275), or substantial authority (there was substantial authority supporting your tax position). If the IRS proposes an accuracy penalty during an audit, you have the right to appeal through the IRS Office of Appeals before the penalty is assessed. Having representation during the audit can help prevent the penalty from being proposed in the first place.