Are you about to take an aggressive position on your tax return that could result in a substantial tax reduction?

If it passes IRS muster, you’re home free.

But if it doesn’t, you could end up having to pay a good-sized penalty.

The IRS can impose a 20 percent penalty for a substantial underpayment of tax. For example, if the IRS concludes you underpaid your taxes by $50,000, it can impose a $10,000 penalty that must be paid in addition to the tax due plus interest.

How big must a tax underpayment be to be “substantial”? Not very big.

Individual taxpayers who understate their tax by more than 10 percent or $5,000, whichever is greater, can end up with this penalty.1 The 10 percent is reduced to 5 percent if you claim the Section 199A qualified business income (QBI) deduction on your return.2

Fortunately, there is a way to avoid the understatement penalty. ... Log in to view full article.