Issues

How To Fight the IRS Accuracy-Related Penalty in Tax Court

Even if you lose the underlying tax issue, you can often defeat the 20% accuracy penalty. Here's how the burden of proof and the § 6751(b) lever work.

Liam Williams

Liam Williams

— 16 min read
Share

You opened your Notice of Deficiency, and below the extra tax there's another line: a 20% accuracy-related penalty. On a $10,000 deficiency that's another $2,000—and that's before interest. It can feel like the case is already lost.

Here's what most pro se petitioners don't realize: the penalty is a separate fight, with its own rules, and you can often win it even if you lose (or settle) the underlying tax issue. The IRS has to come forward first. There's a procedural defense that costs you nothing to raise and sometimes ends the penalty outright. And there's a reasonable-cause defense that is yours to prove.

This is the courtroom companion to How To Request IRS Penalty Abatement. That article is about asking the IRS to remove a penalty administratively—a reasonable-cause letter, First-Time Abate, Form 843—before or outside litigation. This article is about defeating the accuracy penalty in your deficiency case once it's in the Notice of Deficiency and you've petitioned the US Tax Court. If you haven't filed yet, the penalty is one more reason to: under IRC § 6213(a) you have 90 days from the date on the notice (150 days if you're addressed outside the US) to petition, and that deadline cannot be extended.

The accuracy penalty is everywhere in Tax Court. In fiscal year 2024 alone, 172 business and 1,038 individual taxpayers petitioned the Tax Court with an accuracy-related penalty at issue, according to the National Taxpayer Advocate's 2024 Annual Report to Congress. For years it ranked among the most-litigated issues the NTA tracked; the office now folds it into a separate discussion precisely because it rides on top of so many other disputes.

What the Penalty Actually Is—§ 6662

The accuracy-related penalty lives in IRC § 6662. The core rule is simple: the IRS adds an amount equal to 20% of the underpayment to which the section applies. There are several grounds, but as an individual you'll really face one of two.

Negligence or disregard of rules—§ 6662(c). Negligence "includes any failure to make a reasonable attempt to comply" with the tax law, and disregard "includes any careless, reckless, or intentional disregard." In plain English: not keeping the records the law requires, or not making a reasonable effort to get the return right, is negligence.

Substantial understatement of income tax—§ 6662(d). For an individual, an understatement is "substantial" if it exceeds the greater of 10% of the tax required to be shown on the return, or $5,000. The "understatement" is simply the tax you should have shown minus the tax you actually showed. This ground is purely mathematical—if the numbers cross that threshold, the ground is met regardless of how careful you were.

Two escape hatches can shrink a substantial-understatement penalty under § 6662(d)(2)(B)—keep them in mind, but they're things you mostly set up when you file, not courtroom moves:

  • Substantial authority. If there was substantial authority—real weight of cases, regulations, and rulings—for how you treated an item, that item comes out of the penalty base. This works whether or not you disclosed the position.
  • Adequate disclosure plus reasonable basis. If you told the IRS exactly what you did, usually on Form 8275 (Disclosure Statement) or Form 8275-R for a position contrary to a regulation, and you had at least a reasonable basis, that item also comes out. Disclosure does not help against the negligence ground—only against substantial understatement.

A couple of details to keep your bearings. The 20% rate climbs to 40% for gross valuation misstatements (§ 6662(h)) and certain nondisclosed transactions—but the ordinary pro se case is the 20% rate on negligence or substantial understatement. And you don't get stacked: even if a portion of your underpayment qualifies under more than one ground, it's still just one 20% bite on that portion. The separate failure-to-file and failure-to-pay additions under § 6651 are different exactions on a different base; they can appear on the same account, but they aren't the accuracy penalty.

Who Has To Prove What—The Burden Split

This is the conceptual heart of the penalty fight, and the single thing most pro se petitioners get wrong. The key idea: burden of production is not the same as burden of proof.

The IRS bears the burden of production—§ 7491(c). Under IRC § 7491(c), the IRS has the burden of production "with respect to the liability of any individual for any penalty." That means the IRS has to come forward first with evidence that the penalty is appropriate. The framework comes from Higbee v. Commissioner, 116 T.C. 438 (2001): the IRS must produce evidence supporting the penalty before anything shifts to you.

What the IRS has to produce is two things. First, evidence supporting the ground—for substantial understatement, the math showing the understatement really clears the greater-of-10%-or-$5,000 threshold; for negligence, facts showing you didn't make a reasonable effort. Second—and this is the lever we'll come back to—evidence that a supervisor signed off on the penalty in writing under § 6751(b), which Graev v. Commissioner, 149 T.C. No. 23 (2017) folded into the IRS's production burden.

Production is not the finish line. Here's the trap. When the IRS satisfies its burden of production, that does not mean you've lost. It means the ball is now in your court to prove an affirmative defense—reasonable cause and good faith under § 6664(c). Many pro se petitioners hear "the IRS has the burden" and think they can sit back and say nothing. You cannot. Once the IRS produces, the reasonable-cause defense is yours to prove, and if you put on no evidence, the penalty stands.

The separate burden on the underlying tax—§ 7491(a). There's a different burden-shifting rule for the tax itself (as opposed to the penalty). Under § 7491(a), if you introduce credible evidence on a factual issue, the burden can shift to the IRS—but only if you also kept the required records, substantiated your items, and cooperated with the IRS's requests. In practice it rarely shifts, because the taxpayer with thin records fails exactly those conditions, and even when it shifts it seldom changes the result. It's separate from the penalty burden, and it's a tie-breaker, not a rescue. Unreported Income Disputes in Tax Court walks through the § 7491(a) mechanics in detail.

Defense 1—Reasonable Cause and Good Faith (§ 6664(c))

This is your main merits defense to the penalty, and it's the one you have to actually prove.

The standard. IRC § 6664(c)(1) says no accuracy penalty applies to any portion of an underpayment "if it is shown that there was a reasonable cause for such portion" and that you "acted in good faith." Notice the defense is portion by portion: you can win reasonable cause on one adjustment and lose on another, and the penalty then applies only where you came up short.

What "reasonable cause" means. Treas. Reg. § 1.6664-4 makes this a case-by-case, all-the-facts-and-circumstances inquiry. The regulation's headline factor: "the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability." The court also weighs your experience, knowledge, and education, and whether you made an honest, reasonable misunderstanding of fact or law. The thread running through all of it is effort—what you actually did to get the return right.

What evidence actually shows it. Reasonable cause is proved with documents and a credible story, not adjectives. The things that tend to show genuine effort and good faith:

  • Records you kept—a mileage log, an appointment calendar, bank and credit-card statements that reconstruct an expense.
  • Proof you tried to get it right—emails or letters to a preparer or the IRS, notes of advice you received, the tax software you used.
  • A reason the return went wrong that wasn't carelessness—serious illness, a death in the family, a natural disaster, records lost outside your control, or an honest misunderstanding of a genuinely unclear rule.
  • If you used a preparer: the engagement letter and the exact documents you gave them.

In Tax Court you have to put these in as evidence—your own testimony and exhibits—not just assert them.

Reliance on a tax professional—the Neonatology test. If you relied on a preparer or adviser, good-faith reliance can be reasonable cause, but only if you can prove all three prongs the Tax Court set out in Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000):

  1. The adviser was a competent professional with enough expertise to justify your reliance;
  2. You gave the adviser all the necessary and accurate information; and
  3. You actually relied in good faith on the adviser's judgment.

The courtroom catch: in Tax Court you have to put on evidence of all three—usually your own testimony plus records of what you handed the preparer. A bare "my accountant did it" fails prong 2 if you can't show what you actually gave them. So keep the engagement letter, the documents you sent, and the email trail.

The hard boundary—Boyle. There's a line reliance cannot cross. In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court held that relying on an agent to perform the act of filing or paying on time is not reasonable cause—the duty to meet a fixed deadline is yours and nobody needs special training to read a calendar. But relying on a professional's substantive advice about the law can be reasonable cause, because most taxpayers can't be expected to catch an expert's error of judgment. For the accuracy penalty, that's the good news: when the penalty rides on a substantive position a competent adviser handled with full information, Neonatology reliance is squarely in play. Boyle governs the missed-deadline penalties, not this one. The abatement article covers the Boyle doctrine in full—the point here is just the contrast.

Defense 2—The Supervisory-Approval Lever (§ 6751(b))

This is the cheapest, highest-leverage move in the entire penalty fight, and it's available to every pro se petitioner just by pleading it.

The requirement. IRC § 6751(b)(1) says no penalty "shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor" of the person who made it. In other words, before the IRS can stick you with the penalty, a real supervisor has to have signed off on it in writing—and the IRS has to be able to prove that signature exists.

It applies to your penalty. There's an exception in § 6751(b)(2), and it's narrow. It carves out the accuracy penalty only for the economic-substance grounds (§ 6662(b)(9) and (10))—not the ordinary negligence and substantial-understatement penalties you're facing. So your accuracy penalty does require written supervisory approval. The bigger real-world exception is for penalties "automatically calculated through electronic means," discussed below.

It's part of the IRS's burden of production. This is what makes it a lever. Because Graev and Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) made supervisory approval part of what the IRS must produce under § 7491(c), the IRS has to come forward with the signed approval document—in practice a penalty approval form or lead sheet bearing the immediate supervisor's signature and date. If it doesn't produce that on its own, you can formally request it in discovery. And if the IRS can't produce timely written approval, the penalty fails—even if the underlying deficiency is upheld. That's why you raise it every time.

The timing rule changed at the end of 2024—use the current law. This area moved recently, so be careful with older advice. Treasury and the IRS finalized regulations under § 6751(b) on December 23, 2024—T.D. 10017, 89 Fed. Reg. 104,419, codified at 26 C.F.R. § 301.6751(b)-1—and they apply to penalties assessed on or after that date. The regulation sets a bright-line deadline: for an accuracy penalty in a Notice of Deficiency, the supervisor's written approval must be in place on or before the date the notice is mailed. (If the IRS instead raises a new or increased penalty after you've petitioned—in its answer or amended answer—approval must come no later than when it asks the court to determine that penalty.)

That bright line is the current regulatory rule. It is more IRS-favorable than some of the older case law, which in places required approval before the IRS's first formal communication or first Appeals offer. So do not tell yourself the IRS must have approved the penalty before the 30-day letter—under the final regulation, for a deficiency penalty the operative deadline is the mailing date of the Notice of Deficiency.

The "electronic means" exception. If an IRS computer program automatically generates a notice proposing a penalty, that penalty can count as "automatically calculated through electronic means," and then no supervisory approval is required. The classic example is a CP2000 churned out by the Automated Underreporter system with a substantial-understatement penalty attached. But there's a crucial caveat written right into the regulation: if you respond in writing and challenge the proposed penalty (or the tax it's based on) and an IRS employee actually considers your response before assessment or before the notice of deficiency issues, the penalty is no longer "automatically calculated"—which means approval is required again. That's one more reason to file a substantive challenge to a CP2000 rather than just asking for more time.

Be honest with yourself about how settled this is. Two things to keep in view. First, the final regulation is new and is being litigated; commentators expect continued challenges, partly because the Supreme Court's 2024 Loper Bright decision reduced the deference courts give agency regulations. Second, the Tax Court follows the law of the circuit your case can be appealed to when that circuit has squarely decided a point (the "Golsen rule"), so which circuit you're in can still matter at the margins—the Ninth Circuit's Laidlaw's Harley-Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022) is one example of circuit-specific timing law. You don't need to litigate any of that yourself. But it's why this is the part of your case where a Low Income Taxpayer Clinic or practitioner adds the most value—and why you should verify the current state of the law (and any pending legislation) at the time you file. What is settled enough to act on is the move itself: demand the approval form, and if the IRS can't produce timely written approval, the penalty falls. Just don't treat it as an automatic win.

How It Plays Out—Two Real Cases

The clearest way to see the fight is to watch it run. Both cases below come from How To Prove Your Business Expenses to the IRS, where the taxpayers lost on the underlying deductions—this is the "now defend the penalty" sequel. Both taxpayers were self-represented, and neither walked away penalty-free—but both knocked out a piece of what the IRS wanted, in different ways. They show you what the IRS must produce, what you then have to prove, and where penalties actually crack.

A reasonable-cause carve-out—Ayria v. Commissioner, T.C. Memo. 2022-123. Ayria, self-represented, faced a § 6662(b)(2) substantial-understatement penalty of about $6,000. The opinion is a clean run through the whole sequence: the IRS's burden of production under § 7491(c) and Graev; the immediate supervisor's digital approval of the penalty, given well before the notice of deficiency issued, which the court held was timely; and the electronic-means exception. The IRS did § 6751(b) by the book, so that lever didn't help him. The reasonable-cause defense did, in part: the court found Ayria genuinely and reasonably believed his hotel-lodging expenses were deductible, and held he was "not subject to penalty on the portion of the underpayment attributable to" that deduction. He lost most of the penalty and carved off a slice—the § 6664(c) portion-by-portion rule working exactly as written.

Two add-on penalties collapse—Bass v. Commissioner, T.C. Memo. 2023-41. Duncan Bass ran a small business and represented himself. His case has three penalty layers, and each one teaches something. The penalty in his original Notice of Deficiency was sustained—but notice why: the court found it was "automatically calculated through electronic means," so it needed no supervisory approval at all, and Bass couldn't carry his own reasonable-cause burden. Then, as the case developed, the IRS tried to tack on two increased penalties—one in its answer, one in a later amendment prompted by Bass's own trial testimony. Both add-ons fell. The amendment increase died on the § 6751(b) lever: the IRS never got its supervisor-approval evidence into the trial record—it tried to attach the approval emails to a motion after the record had closed, and the court refused to consider them. The answer increase died on a related rule worth knowing: when the IRS raises a new or higher penalty during litigation, it carries the burden of proving you lacked reasonable cause, and here it offered no such evidence. Bass still owed the original penalty, but everything the IRS tried to pile on later fell away.

The honest takeaway from the pair: neither taxpayer escaped penalty-free, but each shows a different part of the machinery working—Ayria the portion-by-portion reasonable-cause carve-out, Bass the § 6751(b) record demand and the burden that flips to the IRS on penalties it raises mid-case. That's why you raise both defenses in every case: they cost nothing, and you can't know which one will bite until you make the IRS produce its approval and put it to its proof.

Your Total Exposure—Penalty Plus Interest

Before you build your defense, get clear on what's actually at stake, because it's more than the penalty line. Your real exposure has three layers:

  1. The deficiency—the additional tax itself.
  2. The 20% accuracy penalty on the underpayment.
  3. Interest. Under IRC § 6601, interest runs on the deficiency from the original due date of the return—and the penalty accrues interest too. The longer it stays unpaid, the more it grows. How Interest Works on Your IRS Tax Debt and Understanding Your IRS Balance show how the pieces add up.

Put it concretely. On the $10,000 deficiency and $2,000 penalty from the top of this article, interest under § 6601 has been running on the tax since the return's original due date, and it keeps running on both the tax and the penalty while you litigate. Because a Tax Court case typically takes 6-18 months to resolve, that layer keeps growing the whole time. Treat the penalty as one piece of a larger number, not the whole bill.

Verify the IRS's numbers before you fight them. Two documents tell you exactly what you're up against:

  • Form 4549 (Report of Income Tax Examination Changes). This is the examination report, and it shows both the proposed deficiency and the penalty—including which § 6662 ground the IRS asserted. Read it to find out which penalty you're defending, because the defense differs: substantial authority and disclosure can cut a substantial-understatement penalty but do nothing for a negligence penalty. (If your penalty came from a CP2000 automated notice rather than a face-to-face audit, you may have no Form 4549—the CP2000 itself shows the proposed penalty and its ground.)
  • Your IRS account transcript. The accuracy penalty posts to your account as an assessment code (the § 6662 penalty generally shows up as a TC 240 reference-numbered penalty, distinct from the failure-to-file and failure-to-pay codes). The account transcript is taxpayer-accessible—you can pull it yourself through IRS.gov to confirm exactly what penalty was assessed and when. See How To Get and Read Your IRS Transcripts and How To Read IRS Transcript Codes for the full map.

What To Do Now

The penalty fight is won on procedure and paper, and most of it costs you nothing. A concrete sequence:

  1. Calendar the 90 days deadline from the date on your Notice of Deficiency and decide whether to petition. If you've already missed it, see You Missed the 90-Day Deadline: Now What—the Tax Court route for a deficiency penalty is generally closed once the deadline lapses.
  2. Pull your account transcript and read Form 4549. Identify which § 6662 ground the IRS asserted—negligence or substantial understatement—because that decides which defense fits. (No Form 4549? A CP2000 shows the same thing.)
  3. In your petition, deny the penalty and demand the § 6751(b) approval. In the part of the petition where you explain what the IRS got wrong (the assignments of error), you can adapt a line like: "The Commissioner erred in imposing the accuracy-related penalty, and Petitioner does not concede that the penalty received timely written supervisory approval as required by IRC § 6751(b)." Tailor it to your facts. This is a routine, expected step—you're holding the IRS to a burden the law already puts on it—and it costs you nothing. Even if you've already filed a bare petition without raising it, you can still put the IRS to its proof in your pretrial memorandum and through discovery.
  4. Build your reasonable-cause record. Marshal the facts that show your effort to get the return right: what you did, what records you kept, and—if you used a preparer—who they were, what you gave them, and the proof you handed over (the Neonatology three prongs). The evidence list under Defense 1 above is your checklist—gather it into exhibits now, not the night before trial.
  5. Lay it all out in your pretrial memorandum. This is where the burden framework and the § 6751(b) demand get spelled out for the judge. See How To Write Your Tax Court Pretrial Memorandum, and don't stipulate the penalty away in your stipulation of facts.
  6. Expect to settle. Most (76%) of Tax Court cases close by settlement, and more than 99% resolve without a trial on the merits. A documented penalty defense—especially a § 6751(b) demand the IRS can't easily meet—is often what produces a concession.

Get Help

Around 89% of Tax Court petitioners represent themselves, and a penalty defense built on the burden split and the § 6751(b) demand is well within reach for a pro se petitioner. But the represented win rate is higher (about 12% pro se versus about 23% represented in the most recent data), and the § 6751(b) area in particular is unsettled enough that experienced help can matter—especially if a circuit-specific timing argument is in play.

If your income is at or below 250% of the poverty line and your dispute is at or below $50,000 per tax year, you may qualify for free representation through a Low Income Taxpayer Clinic. For more complex situations, see When To Get Professional Help With Your Tax Dispute.

Resources

Statute and regulations:

IRS forms and reports:

Cases cited:

Companion articles on TaxCourtHelp:

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.

Read more

TaxCourtHelp.com is not affiliated with the United States Tax Court or any government agency. This site provides general information only and does not constitute legal or tax advice.