Overstated withholding can produce a penalty underpayment without a deficiency

Plain-English summary

Chief Counsel advice explained that overstated withholding can create an underpayment subject to the accuracy-related or fraud penalties under sections 6662 or 6663 even when there is no deficiency. The advice distinguishes deficiencies, which are calculated without regard to section 31 credits, from underpayments. In its example, a reported tax of $3,000 and overstated withholding credits of $8,000 produce an $8,000 underpayment under the cited regulation.

Ruling snapshot

• Question: Can overstated withholding credits create an underpayment subject to penalties even without a deficiency?
• Outcome: Advice given
• Key authorities: IRC §§ 31, 6662, 6663, and 6664; Treas. Reg. § 1.6664-2

Full text (IRS public release)

ID: CCA_2012110717165371 Number: 201302036
Release Date: 1/11/2013
Office: -------------
UILC: 6664.01-00

From: -----------------------
Sent: Wednesday, November 07, 2012 5:16:58 PM
To: ------------------
Cc: ------------------
Subject: Overstated Withholding and Penalties

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--------------asked me to respond to your question. Under §1.6664-2(c)(1)(i), overstated withholding may result in an underpayment subject to section 6662 or 6663, even without a deficiency. There may not be a deficiency because, unlike underpayments, deficiencies are determined without regard to section 31 credits. Using facts from your example: W ("Amount of income tax imposed") = 3,000 (per 1.6664-2(b)) X ("Amount shown as the tax by the tax payer on his return") = 3,000 (the amount shown as the tax by the taxpayer on his return) - (8,000 "the amounts shown by the taxpayer on his return as credits for tax withheld under section 31" - 0 "the amounts actually withheld")= -5,000 per 1.6664-2(c)(1) Y ("Amounts not so shown previously assessed") = none per 1.6664-2(d) Z ("the amount of rebates made") = none per 1.6664-2(e) Underpayment = 3,000 - (-5,000 + 0 - 0) =$8,000 Please contact me if you have any further questions.
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