CCA 200914036: No accuracy-related penalty applied without an underpayment

Plain-English summary

Chief Counsel analyzed whether an accuracy-related penalty applied after accounting for tax carrybacks and carryforwards. Carrybacks cannot reduce an underpayment, while carryforwards enter the computation of the correct tax due. On the facts provided, the tax required to be shown was less than the tax imposed and shown on the return, so there was no underpayment. Because section 6662 penalties require an adjustment attributable to at least part of an underpayment, no penalty applied and the reason for the adjustment did not need to be examined. Counsel declined to provide a hypothetical calculation but offered to review a computation based on specific facts.

Ruling snapshot

• Question: Did an accuracy-related penalty apply when the carryforward-adjusted computation produced no underpayment?
• Outcome: Advice given: no, a section 6662 penalty cannot apply without an underpayment.
• Key authorities: IRC § 6662(b); Treas. Reg. §§ 1.6662-4(b)(4) and 1.6664-2(b), (f).

Full text (IRS public release)

ID: CCA_2009030509220607 Number: 200914036
Release Date: 4/3/2009
Office: --------------
UILC: 6662.00-00

From: ------------------
Sent: Thursday, March 05, 2009 9:22:07 AM
To: -------------------------------------------------------------------------- Cc: ------------------ Subject: RE: Penalty Computation Question ---------

Treas. Reg. 1.6664-2(f) states that carrybacks cannot be used to reduce the amount of an underpayment. Carryforwards are included in determining the amount of the underpayment because they are used in determining the proper amount of tax due and are not specifically excluded from the calculation. The facts you have provided show that the amount of tax required to be shown (as defined in Treas. Reg. § 1.6664-2(b)) is less than the “amount of tax imposed which is shown on the return” (as defined in Treas. Reg. § 1.6662-4(b)(4)). Under these facts an underpayment does not exist and therefore a section 6662 penalty would not apply. An adjustment can only be an adjustment to which a penalty applies if all or a portion of an underpayment is attributable to negligence, a substantial understatement or income tax, a valuation misstatement, an overstatement of pension liabilities , or a substantial estate or gift tax valuation understatement. IRC § 6662(b). The first step is determining that an underpayment exists. Where an underpayment does not exist, it is not necessary to determine why an adjustment is being made.

We are not able to provide a hypothetical computation of the penalty beyond what appears in the examples section of the regulation. We are however, willing and able to review any questions you may have regarding the calculation of a penalty as it relates to a set of specific facts. Please let me know if you have any additional questions or would like to discuss this issue further.

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