Franchise Tax Board Penalties: Accuracy-Related Penalties, Part I: The Basics

It’s not enough to just file your tax returns and pay some amount to the government – the penalties for incorrect returns can be as significant as those for late filing and payment. There are quite a few accuracy-related penalties on both the federal and state levels – in the next few posts, we will highlight some California Franchise Tax Board (FTB) accuracy-related penalties, explain what can get you in trouble, and how you may be able to get these penalties reduced or eliminated.

The accuracy-related penalty

If you input in your California tax return an amount of tax due that is less than what is legally required, you are likely to be assessed a penalty for underpayment. The penalty is imposed at the federal and state levels on taxpayers who have engaged in any of the following:

  • Negligence or disregard of tax rules and regulations
  • Substantial understatements of income tax and/or asset valuations
  • A substantial overstatement of pension liabilities
  • Failure to disclose a foreign financial asset
  • Claiming a tax benefit for a transaction that lacks economic substance

The California Revenue and Taxation Code (R&TC) Section 19164 accuracy-related penalty for individuals is determined in accordance with the federal statute (26 U.S. Code § 6662) – 20% of the tax underpayment, or 40% for tax years prior to January 1, 2003, with exceptions (or for any gross misstatement, see Part III).

Penalty abatement

Accuracy-related penalties can be abated (reduced or eliminated) if you can demonstrate that you had reasonable cause for amounts claimed on your return and that you claimed those amounts in good faith – in other words, that you made an effort to comply and did not simply ignore the rules. You and your tax attorney will have to explain why you took a position on your tax return that is contrary to the norm, cite legal authority for your position, and explain how it applies best in your circumstances.

In the next two posts, we will cover tax return inaccuracies that are likely to result in the imposition of accuracy-related penalties.

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