Reed Smith Client Alerts

The Franchise Tax Board (FTB) liberally imposes the accuracy-related penalty on taxpayers that are subject to any audit adjustment as a result of taking a legal or factual position, including taxpayers that applied an equally-weighted three-factor apportionment method in reliance on the California Court of Appeal decision in Gillette. However, taxpayers may be able to obtain full relief from the accuracy-related penalty if the penalty was imposed by the FTB auditor without supervisory approval, regardless of whether the taxpayer satisfies one of the general exceptions to the penalty.


California conforms to the federal accuracy-related penalty that is determined in accordance with IRC § 6662.1 IRC § 6662(a) provides that, for an applicable “portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.”

Generally, there are three statutory exceptions to the imposition of the accuracy-related penalty:

  1. the taxpayer is able to show that there is substantial authority for the tax position resulting in the underpayment;2
  2. the taxpayer is able to show that the underpayment was due to reasonable cause and that it acted in good faith with respect to such portion of the underpayment;3 or
  3. the taxpayer is able to show it adequately disclosed the tax position resulting in the underpayment, and that there is a reasonable basis for the tax position.4

Each of these statutory exceptions puts the burden on the taxpayer to show that the accuracy-related penalty was improperly imposed. However, there is another defense that puts the burden on the FTB. A taxpayer can challenge the imposition of the penalty based on whether the auditor received approval from an immediate supervisor to impose the accuracy-related penalty.