No. For U.S. federal income tax, the IRS can disallow a deduction without automatically imposing a penalty. A penalty is a separate determination: it generally requires a statutory basis, such as negligence or a substantial understatement, and applies to the relevant portion of an underpayment or claim. The tax year, deduction type, records, and reason for the adjustment all matter.
Why disallowance and a penalty are separate
A deduction may be disallowed because it does not meet the tax rules or because the taxpayer cannot substantiate it. That adjustment can increase the tax due, but the increase alone does not establish that a penalty applies. The IRS must also identify a penalty rule that fits the facts and the portion of tax involved.
This article covers U.S. federal income tax only. State and local taxes and other federal taxes may follow different rules. The IRS’s accuracy-related penalty guidance and the November 2024 Instructions for Form 8275-R describe the principal federal rules, but they do not decide an individual taxpayer’s case.
When an accuracy-related penalty may apply
An accuracy-related penalty generally applies to the portion of an underpayment attributable to a specified statutory ground—not automatically to every disallowed item. The IRS’s November 2024 Form 8275-R instructions describe a general 20% rate for covered portions, including those attributable to negligence or disregard of rules or regulations and substantial understatement of income tax. The instructions also describe a 40% rate for certain gross valuation misstatements and specialized statutory categories that include certain specified deduction disallowances. The particular ground and any applicable exception must be checked for the tax year at issue.
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Negligence or disregard
The IRS describes negligence as failing to make a reasonable attempt to comply with tax law. Inadequate books or records can be relevant. A return position with a reasonable basis is not negligence, and the IRS says reasonable cause and good faith may prevent an accuracy-related penalty on the relevant portion, subject to exceptions for particular statutory categories. Publication 550 (2025) states: “Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code.” See the IRS’s Publication 550.
Substantial understatement
The November 2024 Form 8275-R instructions give a general threshold for an individual income-tax substantial understatement: the understatement must exceed the greater of 10% of the tax required to be shown or $5,000. Special rules may apply to particular items, and the applicable threshold must be verified for the return year. The 2024 instructions are not a timeless rule or a substitute for checking the law and IRS guidance for a later year. The IRS also identifies a special rule connected with a Section 199A deduction on its accuracy-related penalty page.
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How records, reasonable basis, and disclosure affect the result
Records matter because a taxpayer generally needs support for claimed items. The IRS identifies inadequate books or records as relevant to negligence; attaching an explanation does not make an unsubstantiated deduction allowable or cure a failure to keep proper records.
Disclosure can matter in narrower circumstances. Adequate disclosure may avoid certain disregard or substantial-understatement portions of an accuracy-related penalty when the position also has at least a reasonable basis. Disclosure alone is not a guarantee, and the applicable standard and procedure can depend on the tax year, return, and type of position. The Form 8275-R instructions describe reasonable basis as “a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper.”
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When a refund or credit claim raises a different penalty issue
If the issue involves an excessive income-tax refund or credit claim, a separate erroneous-claim penalty may be relevant when reasonable cause does not apply. The IRS says this penalty is not figured on a disallowed portion that is subject to an accuracy-related or fraud penalty. This is a distinct question from whether an ordinary deduction on an original return is disallowed. See the IRS’s erroneous claim for refund or credit guidance.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to check if the IRS sends a notice
Read the notice carefully before responding. Identify the proposed adjustment, tax year, response deadline, and stated legal basis for any penalty. Separate the proposed increase in tax from the penalty: the IRS may adjust a deduction and assert a penalty, but each has its own basis.
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- Gather receipts, statements, logs, and other records supporting the deduction and how it was reported.
- Check whether the notice says the issue is substantiation, negligence or disregard, substantial understatement, a special statutory rule, or an excessive refund or credit claim.
- Consider whether the facts support reasonable cause, good faith, reasonable basis, or qualifying disclosure under the rule cited in the notice.
- Respond by the notice deadline, following its instructions. An explanation, appeal, or disclosure does not guarantee that the penalty will be removed.
The outcome depends on the deduction, the records, the return position, the tax year, and the specific penalty asserted. IRS publications explain general standards; they do not determine whether an individual taxpayer qualifies for an exception.
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