It's proposed automatically and defeated substantively: reasonable cause, substantial authority, disclosure. Here's how IRC 6662 actually works and where it loses.
The accuracy-related penalty rides along on nearly every CP2000 and audit adjustment: 20% of the underpayment for negligence or substantial understatement, 40% for gross valuation misstatements and undisclosed foreign understatements. Unlike late-filing penalties there's no first-time abatement — the defenses are substantive: reasonable cause and good faith, substantial authority, and adequate disclosure. All three are argued, not applied for.
The penalty is a percentage of the underpayment — shrink the underpayment and the penalty shrinks with it.
Good-faith reliance on records, software, or a competent preparer given full facts — write the sentence; silence concedes it.
A position with substantial authority carries no penalty even when it loses. Disclosed positions (Form 8275) need only a reasonable basis.
Examiner-asserted penalties need written supervisor sign-off before assertion — its absence kills the penalty.
Every notice page explains the deadline and drafts the response letter free — find yours.
Look up your IRS notice →IRC 6662 adds 20% of an underpayment attributable to negligence (no reasonable attempt to comply) or a substantial understatement (more than the greater of 10% of the correct tax or $5,000). Certain valuation misstatements and undisclosed foreign-asset understatements run at 40%.
Respond to the CP2000 itself: the penalty falls with the underlying adjustment, and even where the adjustment stands, reasonable cause + good faith (you relied on the 1099s you had, on professional advice, on a defensible position) defeats the penalty. Say so explicitly — the computer proposes it by default; a human has to sustain it.
For non-tax-shelter positions, no penalty applies if substantial authority (code, regs, cases, rulings) supported the position — or if it was disclosed on Form 8275 with a reasonable basis. It's an objective standard: roughly a one-in-three chance of prevailing, not a coin flip.
IRC 6751(b) requires written supervisory approval before certain penalties are asserted. Computer-generated accuracy penalties on CP2000s fall under an exception, but examiner-asserted penalties without timely approval get thrown out regularly — worth checking in any audit.