The IRS can add a 20% accuracy-related penalty to a return that understates tax by more than the greater of $5,000 or 10% of the correct tax, the agency says. The penalty is 20% of the underpayment itself, charged on top of the missing tax and the interest on it. The rule comes from Section 6662 of the Internal Revenue Code and applies to individual returns every filing season.
Two numbers set the trigger, and the larger one controls. For individuals, the IRS says the penalty applies when a return understates tax liability by 10% of the tax required to be shown on it or by $5,000, whichever is greater. Smaller errors fall below that line, though the IRS has a separate negligence ground for the same 20% that is tested differently.
For retirees, the question is whether an honest mistake on a return can reach that line. Omitting income shown on a Form 1099 and claiming a deduction or credit that seems too good to be true are the examples the IRS itself gives of negligence. The agency says the penalty is avoided by filing accurately and on time and paying by the due date, and a dispute after a notice follows the notice’s instructions, with a signed explanation and supporting documents.
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How the greater-of test works in dollars
The test is easiest to see with numbers. As an illustration of the formula, take a return where the correct tax is $30,000. Ten percent is $3,000, so the $5,000 figure is the larger one. A $4,000 understatement stays under the line for this penalty, while a $6,000 understatement crosses it and carries a 20% penalty of $1,200.
On a return where the correct tax is $80,000, the 10% figure of $8,000 is the larger one. An understatement of $9,000 exceeds it, and the penalty is $1,800. The higher a household’s real tax, the larger a mistake has to be before this penalty applies, but once it applies the 20% attaches to the underpayment the understatement caused, not just the slice above the line.
The statute, Section 6662, words the test as an understatement that “exceeds the greater of” 10 percent of the tax required to be shown or $5,000. It also reduces the understatement by any portion backed by substantial authority, or by a reasonable basis plus adequate disclosure on the return or an attached statement. A position taken openly, with real support, can therefore fall outside the penalty.
Taxpayers who claim the qualified business income deduction under Section 199A face a lower line. For them the IRS says the threshold is 5% of the tax required to be shown, or $5,000, whichever is greater. Retirees with self-employment or qualifying rental income who take that deduction are the ones to whom the lower percentage applies.
Negligence is a second route to the same 20%
The IRS accuracy-related penalty page defines negligence as not making a reasonable attempt to follow the tax laws when preparing a return. Disregard means carelessly, recklessly or intentionally ignoring tax rules or regulations. The penalty is 20% of the portion of the underpayment attributable to either one.
That makes the dollar test only half the picture. A return can be under the $5,000-or-10% line and still draw the penalty if the underpayment came from a failure to follow the rules, such as leaving off income that was reported to the IRS on a Form 1099. Interest is charged on penalties as well, so the cost keeps growing until the balance is paid.
The statute also has a higher tier. For the portion of an underpayment attributable to gross valuation misstatements, Section 6662(h) substitutes 40 percent for 20 percent. The IRS’s accuracy-penalty page describes the 20% rate that applies to the substantial-understatement and negligence grounds.
Reasonable cause and getting a penalty removed
The IRS says it may remove or reduce a penalty when the taxpayer acted in good faith and can show reasonable cause. Its penalty-relief guidance lists what it weighs: the taxpayer’s efforts to report the correct tax, how complex the issue was, the taxpayer’s education and experience, and the steps taken to understand the obligation or seek help from a tax advisor.
Reliance on an advisor counts only in some cases. The IRS may look at whether the taxpayer gave the advisor all the information needed and whether the advisor was competent and experienced with the tax situation. A retiree who handed a preparer every 1099 and statement is in a different position from one who withheld a form.
The request starts with a call to the toll-free number at the top right corner of the notice, with the notice, the penalty at issue and the reasons ready. If the phone request cannot be approved, relief can be requested in writing on Form 843. The IRS says interest on a penalty is reduced or removed only if the penalty itself is.
Interest is the part that keeps running. IRS Notice 746 says interest on an accuracy-related penalty runs from the later of the return’s due date or its extended due date. On a $1,200 penalty, interest has been accumulating since that date, long before the notice arrives, and paying the penalty in full stops further penalties and interest from accruing.
Free help exists for taxpayers who cannot afford a representative. The IRS points to the Taxpayer Advocate Service and to Low Income Taxpayer Clinics, and a taxpayer can authorize someone to speak for them with Form 2848. Publication 1, Your Rights as a Taxpayer, lists what can be expected from the agency during a dispute.
A penalty proposed in a notice is a moment where paperwork decides the outcome. A signed explanation with supporting documents is what the IRS asks for, and a household that kept the 1099s, the preparer’s worksheets and the dates of its decisions has far more to show than one that kept only the return. Keeping them for the life of the return is the cheapest protection against a 20% charge.
Not sure the Social Security figure on the return is right?
A 20% penalty on a $6,000 understatement is $1,200, and interest starts from the return’s due date. For a retiree, the lines most likely to move a tax bill are the taxable share of Social Security and the senior deduction, because both depend on income figures that have to be worked out by hand.
Cut Your Retirement Tax Bill: 12 Moves covers both: the new $6,000 senior deduction ($12,000 for a couple) for 2025 through 2028, and how much of Social Security is taxed, worked out on one worksheet.
The guide also puts the 2026 numbers on one page, with the form to use for each of the 12 moves, so the figures going onto a return can be matched against a single reference.
Get the Social Security tax worksheet and senior deduction guide →
This article was produced with AI assistance and edited for accuracy against the sources linked above.
