> Yahoo! is not affiliated with the authors of this page or responsible for its content.
Part III - Administrative, Procedural, and Miscellaneous Temporary rules under section 6662A and sections 6662 and 6664, as amended Notice 2005-12



Part III - Administrative, Procedural, and Miscellaneous




Temporary rules under section 6662A and sections 6662 and 6664, as amended




Notice 2005-12


The purpose of this notice is to alert taxpayers to the recent enactment of section
6662A and amendments to sections 6662 and 6664 of the Internal Revenue Code,
provide interim guidance relating to these provisions and invite comments from the
public regarding the rules and standards relating to section 6662A and sections 6662
and 6664, as amended.
BACKGROUND
The American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418
(the Act), was enacted on October 22, 2004. Section 812 of the Act added section
6662A, which provides a new penalty for understatements with respect to reportable
transactions. Section 812 also added section 6664(d), which provides a defense to the
penalty under section 6662A if the taxpayer acted with reasonable cause and in good
faith. Sections 812 and 819 of the Act amended section 6662(d) to modify the
accuracy-related penalty under section 6662(d) for substantial understatements of
income tax. (1)
Section 6662A, Imposition of Accuracy-Related Penalty on
Understatements with Respect to Reportable Transactions.

Section 812 of the Act added section 6662A to the Code, which provides that a
20-percent accuracy-related penalty may be imposed on any reportable transaction
understatement. Under section 6662A, a reportable transaction understatement
means the sum of (1) the product of (A) the amount of the increase (if any) in taxable
income which results from a difference between the proper tax treatment of an item to
which section 6662A applies and the taxpayers treatment of such item (as shown on
the taxpayers return of tax), and (B) the highest rate of tax imposed by section 1
(section 11 in the case of a corporation), and (2) the amount of the decrease (if any) in
the aggregate amount of credits determined under subtitle A which results from a
difference between the taxpayers treatment of an item to which section 6662A applies
(as shown on the taxpayers return of tax) and the proper tax treatment of such item.
The penalty provided by section 6662A applies only (1) to listed transactions and
(2) to reportable transactions (other than a listed transaction) if a significant purpose of
the transaction is the avoidance or evasion of Federal income tax. In addition, a higher
30-percent penalty applies to a reportable transaction understatement if a taxpayer
does not adequately disclose, in accordance with regulations prescribed under section
6011, the relevant facts affecting the tax treatment of the item giving rise to the
reportable transaction understatement. The reasonable cause and good faith defense
is not available with respect to the 30-percent penalty. See I.R.C. §§ 6662A(c) and
6664(d)(2)(A).
Section 6662A(e)(3) sets forth a special rule for amended returns. The tax

2 treatment on an amendment or supplement to a return is not taken into account in
determining the amount of a reportable transaction understatement if the amendment or
supplement is filed after the earlier of (1) the date the taxpayer is first contacted by the
IRS regarding an examination of the return or (2) any other date specified by the
Secretary.
(2)
Section 6662, Imposition of Accuracy-Related Penalty on Underpayments.

Section 6662(d) imposes a 20-percent accuracy-related penalty for any
substantial understatement of income tax. Under section 6662(d)(1)(B), as amended, in
the case of a corporation (other than an S corporation or a personal holding company),
there is a substantial understatement of income tax for any taxable year if the amount of
the understatement for the taxable year exceeds the lesser of (1) 10 percent of the tax
required to be shown on the return for the taxable year (or, if greater, $10,000), or (2)
$10,000,000. In the case of all other taxpayers, an understatement is substantial if it
exceeds the greater of 10 percent of the tax required to be shown on the return or
$5,000.
Under section 6662(d)(2), an understatement is the excess of (i) the amount of
tax required to be shown on the return for the taxable year over (ii) the amount of tax
imposed which is shown on the return, reduced by any rebate. This excess is
determined without regard to items to which section 6662A applies. The reportable
transaction understatement, however, is added to the understatement calculated under
section 6662(d)(2) for purposes of determining whether an understatement is
substantial under section 6662(d)(1). Under section 6662A(e)(1)(B), in the case of an

3 understatement, the addition to tax under section 6662(a) applies only to the excess of
the amount of the substantial understatement over the aggregate amount of the
reportable transaction understatements. Accordingly, the accuracy-related penalty
attributable to substantial understatement of income tax does not apply to an
understatement on which the section 6662A penalty is imposed.
Section 6662A does not apply to any portion of an understatement on which the
section 6663 fraud penalty or the section 6662(h) accuracy-related penalty for a gross
valuation misstatement is imposed. Section 6662(e) (substantial valuation
misstatement) does not apply to any portion of an understatement on which a penalty
under section 6662A is imposed.
Under section 6662(d)(2), as amended, the understatement with respect to any
item attributable to a tax shelter item, including tax shelter items of taxpayers other than
corporations, will not be reduced even if the taxpayer has substantial authority and a
reasonable belief that the tax treatment of an item attributable to a tax shelter item was
more likely than not the proper treatment. The taxpayer may, however, demonstrate
reasonable cause and good faith under section 6664(c).
(3)
Section 6664, Definitions and Special Rules.

The accuracy-related penalty under section 6662A does not apply with respect to
any portion of a reportable transaction understatement if, pursuant to section 6664(d), it
is shown that there was reasonable cause and the taxpayer acted in good faith with
respect to that portion of the understatement. A taxpayer does not have reasonable
cause and did not act in good faith unless (1) the relevant facts affecting the tax

4 treatment of the item are adequately disclosed in accordance with regulations
prescribed under section 6011; (2) there is or was substantial authority; and (3) the
taxpayer reasonably believed that its treatment of the item was more likely than not the
proper tax treatment. A taxpayer is treated as having a reasonable belief only if the
belief is based on the facts and the law that exist at the time the return is filed and the
belief relates solely to the taxpayers chances of success on the merits of the tax
treatment of the issue.
An opinion of a tax advisor may not be relied upon to establish the reasonable
belief of the taxpayer if the advisor or the opinion is disqualified. A tax advisor is
disqualified if the tax advisor (1) is a material advisor under section 6111, as amended,
and participates in the organization, management, promotion, or sale of the transaction
or is related to any person who so participates; (2) is compensated directly or indirectly
by a material advisor with respect to the transaction; (3) has a fee arrangement with
respect to the transaction that is contingent on all or part of the intended tax benefits
from the transaction being sustained; or (4) has any other disqualifying financial interest
with respect to the transaction as identified by the Secretary.
An opinion is disqualified if the opinion (1) is based on unreasonable factual or
legal assumptions (including assumptions as to future events); (2) unreasonably relies
on representations, statements, findings or agreements of the taxpayer or any other
person; (3) does not identify and consider all relevant facts; or (4) fails to meet any other
requirement as the Secretary may prescribe.

5 INTERIM PROVISIONS
The Treasury Department and the IRS intend to issue regulations implementing
the requirements of section 6662A and sections 6662 and 6664, as amended. Section
812 of the Act, which added section 6662A and amended sections 6662 and 6664 is
effective for taxable years ending after October 22, 2004. Section 819 of the Act, which
separately amended section 6662, is effective for taxable years beginning after October
22, 2004. The Treasury Department and the IRS provide the following interim rules to
implement the requirements of sections 6662, 6662A and 6664. These interim rules will
apply until further guidance is issued.
(1)
Adequate disclosure in accordance with section 6011
As noted above, the 30-percent penalty provided by section 6662A applies to a
reportable transaction understatement if the taxpayer does not adequately disclose the
relevant facts affecting the tax treatment of the item under section 6011. A ta