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April 2009 - Large Corporate Understatement Penalty Frequently Asked Questions

In December 2008, we constructed a set of frequently asked questions (FAQs) to further explain the large corporate understatement penalty. The new penalty9 applies to corporations for taxable years beginning on or after January 1, 2003, where the corporation has an understatement of tax in excess of $1 million. The penalty is 20 percent of the entire amount of the understatement. The understatement is measured by the difference between the tax reported on the original return or on an amended return, filed on or before the extended due date, and the correct tax liability.

For the purpose of this penalty for taxable years 2003-2007, a taxpayer can file an amended return and pay the tax shown on the amended return by May 31, 2009, to treat the tax shown on this amended return as tax shown on the original return. This will increase the self-assessed tax base against which the understatement is measured to reduce the likelihood of receiving this penalty.

Recently, we drafted an additional set of FAQs for the large corporate understatement penalty addressing procedures on the following subjects:

  1. Filing of amended returns for pre-2008 taxable years.
  2. Payment of amount shown on such amended returns.
  3. Method to alleviate burden of filing such amended returns in the following situations:
    • Pending proposed assessments.
    • Disputed proposed assessments.
    • Final proposed assessments.

We held an Interested Parties Meeting on March 23, 2009 collecting your comments and recommendations regarding these purposed FAQs. This second draft of FAQs is designed to answer questions relating to the implementation and administration of the cure provision of this penalty. Stay tuned for the results.


9California Revenue and Taxation Code section 19138(b).