Substantial Understatement Penalty

The Substantial Understatement Penalty is a tax penalty imposed by the IRS when a taxpayer significantly underreports their income or overstates deductions, resulting in a lower tax liability than owed. Typically, this occurs if the understatement exceeds a certain threshold, usually 10% of the tax owed or $5,000 for individuals. The penalty encourages accurate reporting and compliance with tax laws. Taxpayers may avoid this penalty if they can show that they had reasonable cause for the error and acted in good faith. It is important to be diligent in reporting to avoid unexpected penalties.