The IRS may impose a twenty percent accuracy-related penalty if it determines that there is a substantial understatement of income tax according to IRC 6662. You may avoid all or part of the penalty by showing that:
(1) you acted in good faith,
(2) the understatement was based on substantial authority, or
(3) there was a reasonable basis for the tax treatment of the item and the relevant facts were adequately disclosed.
Clearly if it is mutually agreed that there is reasonable basis and relevant facts were adequately disclosed or the understatement was based on ‘substantial authority’ there would be no question as to abatement.
Good faith however is purely subjective. To that we turn to the US Tax Court in review of case precedent do get an idea of what constitutes having “Acted in Good Faith” when asking for relief from an accuracy related penalty. The case I suggest reading is:
Seven W. Enterprises, Inc. & Subsidiaries, Petitioners v.
Commissioner of Internal Revenue, Respondent
Highland Supply Corporation & Subsidiaries, Petitioners v.
Commissioner of Internal Revenue, Respondent 136 T.C. No. 26
Basically the determination of whether you acted with reasonable cause and in good faith depends upon facts and circumstances of each specific case, specifically scrutinized will be your: