CCA 200909059: Credits enter the penalty underpayment calculation

Plain-English summary

Chief Counsel explained how to compute an underpayment before applying a penalty. The calculation compares the tax shown on the taxpayer's return with the correct income tax after adjustments, and credits generally enter the correct-tax figure unless a regulation provides otherwise. The penalty then applies only to the part of the underpayment attributable to penalized adjustments. Amounts tied to non-penalized adjustments, such as a general business credit adjustment for which no penalty applies, are removed under the ordering rules.

Ruling snapshot

• Question: How should credits and non-penalized adjustments be handled when computing an underpayment penalty?
• Outcome: Advice given: include credits in determining the underpayment, then remove amounts attributable to non-penalized adjustments.
• Key authorities: Treas. Reg. §§ 1.6664-2 and 1.6664-3.

Full text (IRS public release)

ID: CCA_2008122315503807 Number: 200909059
Release Date: 2/27/2009
Office: --------------
UILC: 6664.01-00

From: ------------------
Sent: Tuesday, December 23, 2008 3:50:56 PM
To: -------------------------------------------------------------------------- Cc: ------------------ Subject: RE: Penalty Computation Question

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-------In calculating the penalty the first step is determining the amount of the underpayment. Treas. Reg. § 1.6664-2. The underpayment measures the difference between the amount of tax actually shown on the return filed by the taxpayer (as defined in section 1.6664-2(c)) and the actual amount of income tax imposed after all adjustments are made (as defined in section 1.6664-2(b)). In determining the correct amount of tax imposed credits are generally considered. Any exceptions to this general rule are specifically noted in the calculation regulations. Once an underpayment is concerned the penalty is applied to only the portion of the underpayment attributable to the penalty. Amounts attributable to non-penalty adjustments (which may include credits) are subtracted out according to the ordering rules of Treas. Reg. § 1.6664-3. Several examples help illustrate how this process takes place. Thus, in the case of a general business credit adjustment for which the penalty does not apply, the underpayment attributable to this adjustment is removed before the penalty is applied. Generally an over assessment should not be accounted for separately as it should not enter the determination of the underpayment calculation. Please let me know if you have any additional questions.

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