IRS Penalties

Accuracy-Related Penalty IRS: The 20% Penalty Explained (2025)

By Angeline Balsitis, EA · Reviewed by Melissa Ly, Chief Tax Officer · Updated October 4, 2025 · Editorial Standards

What the accuracy-related penalty is

The accuracy-related penalty comes from Internal Revenue Code Section 6662. In plain English: the IRS believes the tax on your return was too low, and it is adding a 20% charge on top of the extra tax you now owe. This is different from the failure-to-file or failure-to-pay penalties — those are about being late. This one is about the numbers being wrong.

The IRS most often applies it for one of two reasons (its own explainer is at Accuracy-related penalty on IRS.gov):

• Negligence or disregard of the rules — you didn't make a reasonable attempt to follow the tax law, or you ignored instructions, or you didn't keep records to back up what you claimed.
• Substantial understatement of income tax — the tax you should have reported was understated by more than the greater of 10% of the correct tax or $5,000 (the dollar threshold is higher for corporations).

Important: an accuracy-related penalty is not a fraud penalty. Fraud is a separate, much harsher charge (often 75%) that requires the IRS to prove you intended to cheat. The 20% penalty is for mistakes the IRS treats as careless — not crimes.

How the 20% penalty is calculated

The penalty is 20% of the "underpayment" — the difference between the tax you reported and the tax the IRS says you actually owed. Here is a concrete example:

• You reported $18,000 in tax.
• The IRS adjusts your return — say, for a missing 1099 — and says the correct tax was $28,000.
• Your underpayment is $10,000.
• The accuracy-related penalty is 20% of that: $2,000.
• On top of that, you owe the $10,000 in tax, plus interest on both the tax and the penalty.

So a single missed form can turn a $10,000 tax bill into roughly $12,000 before interest. And because interest on this penalty generally runs from the original due date of the return, the total grows the longer it sits unaddressed.

In two narrow situations the rate doubles to 40%: gross valuation misstatements and certain undisclosed foreign financial assets. Most ordinary taxpayers never see the 40% version — but it's worth knowing the difference if a notice quotes it.

Why you got hit with it

The accuracy-related penalty rarely arrives on its own. It usually rides along with a notice that changed your tax. The most common trigger is a CP2000 notice — the IRS's automated under-reporter program — when income reported to the IRS (W-2s, 1099s, brokerage statements) doesn't match what's on your return. It also shows up at the end of an audit when the examiner disallows deductions or adds income.

Typical real-world causes:

• Forgetting a 1099 — contract work, investment income, retirement distributions, or canceled debt.
• Claiming deductions or credits you couldn't fully support with records.
• Math or position errors that pushed your tax well below the correct figure.

What happens if you ignore it

The penalty doesn't go away on its own, and the IRS collection system is automated and unforgiving of delay. Here's the path a proposed accuracy-related penalty usually follows if you don't respond:

1. CP2000 or audit report — the penalty is proposed. You have about 30 days to agree or disagree. This is your best, cheapest moment to fight it.
2. Notice of Deficiency (90-day letter) — if you don't resolve it, the IRS issues a formal notice. You have 90 days to petition the U.S. Tax Court before the tax and penalty are assessed.
3. Assessment and billing — once assessed, you'll get a bill (often a CP14), and the balance enters normal collection with interest still accruing.
4. Collection notices and enforcement — ignored bills escalate through reminder notices to liens and, eventually, levies on wages and bank accounts.

The takeaway: the earliest stage is where you have the most power and the most options. Every step you skip narrows what you can do.

How to remove or reduce the accuracy-related penalty

You have more than one way to fight this. Which fits depends on whether you disagree with the tax, the penalty, or both.

• Dispute the underlying tax. If the adjustment that triggered the penalty is wrong — the income wasn't yours, the deduction was valid, the IRS double-counted — knocking out the tax also knocks out the 20% penalty built on it.
• Reasonable cause and good faith. This is the main defense to the penalty itself. Under IRC Section 6664, the penalty doesn't apply where you had reasonable cause and acted in good faith — for example, you reasonably relied on a competent tax professional, kept ordinary records, or made an honest, defensible interpretation of an unclear rule. Our guide to reasonable-cause penalty abatement walks through what the IRS looks for.
• Adequate disclosure or substantial authority. For a "substantial understatement," the penalty can be reduced or avoided if you had substantial authority for your position, or you disclosed the position on your return and had a reasonable basis for it.
• Form 843 after assessment. If the penalty has already been assessed and you've paid it, you can request abatement or a refund using Form 843 with a written explanation.

One thing that does not work here: first-time penalty abatement. That clean-record relief only covers failure-to-file, failure-to-pay, and failure-to-deposit penalties — not the accuracy-related penalty. Anyone telling you to "just ask for first-time abatement" on this one is pointing you at the wrong door.

How to respond, step by step

1. Read the notice and find the deadline. A CP2000 or audit report gives you about 30 days. Mark it.
2. Compare the IRS numbers to your records. Pull your return, your 1099s and W-2s, and your wage and income transcript. Decide whether you actually owe the extra tax.
3. If the tax is wrong, dispute it in writing with documentation. Removing the tax removes the penalty.
4. If the tax is right but the penalty isn't fair, build a reasonable-cause case. Write out what happened, why you acted in good faith, and attach proof — professional advice you relied on, records, or the unclear rule you reasonably followed.
5. Respond before the deadline using the address or fax on the notice, and keep copies of everything you send.
6. If it's already assessed, request abatement or a refund with Form 843 and a clear written explanation.
7. If the dollars are large or the issue is complex, get a professional review first — the order you handle the tax and the penalty in changes the outcome.

Accuracy-related penalty questions, answered

This guide is general information, not tax or legal advice for your specific situation. Eligibility for IRS programs depends on individual facts and circumstances; no outcome is guaranteed.

Related: CP2000 notice guide · how big IRS penalties get · or browse all guides.