Valuation Penalty On Tax Returns

As a bankruptcy lawyer I know that tax problems can add to a person’s financial woes, and what can aggravate an individual’s tax problems is the array of penalties that are contained in the Internal Revenue Code.

One such penalty is what is called the substantial valuation penalty. It applies to any value or adjusted basis stated on a tax return that is 150% or more of the correct figure. It also applies to transfer price adjustments between related taxpayers when the price of property or services is less than 50% or more than 200% of the correct figure. It also applies, if the IRS makes a net adjustment to taxable income between related taxpayers that exceeds $5,000,000 or 10% of the taxpayer’s gross receipts.

The penalty normally equals 20% of any underpayment of tax that results from the misstatement; however, it rises to 40% if it is considered a gross misstatement. A gross misstatement would be one that is at least twice as large as a misstatement that would generate the normal payment.