What is the definition of “substantial understatement” of income tax?
It is important for CPA's and other tax preparers to understand the IRS's definition of "what is a “substantial understatement” of income tax with respect to filing an Individual Income tax return?"
The IRS has stated that "for an individual taxpayer, an understatement that exceeds the greater of 10% of the tax required to be shown on the return or $5,000 qualifies as a substantial understatement of tax under §6662."
For a corporation (other than an S corporation or a personal holding company), a substantial understatement is one that exceeds the lesser of 10% of the amount required to be shown on the return (or $10,000 if greater) or $10 million.
Except for tax shelter items, the amount of the understatement is reduced by the portion attributable to the tax treatment of any item for which there is substantial authority or about which the relevant facts were adequately disclosed, provided that the taxpayer had reasonable basis for the tax treatment of the item."