Penalties Abusive tax shelters

These penalties are known as Investor (participant) penalties.

1. Noneconomic Substance Transaction Understatement (NEST) penalty

   Why you received this penalty

   You entered into a transaction that did not have economic substance resulting in understatement.

   Visit R&TC 19774 for more information.

   Penalty

   • 40% of the understatement
   • 20% of the understatement if the transaction is adequately disclosed

   Relief of penalty

   To request relief from the penalty:

   Complete form Request for Chief Counsel to Relieve Penalties (FTB 626)

   • Attach a statement specifying the facts and reasons supporting the request for relief from the penalty
   • FTBs Chief Counsel may reduce all or a portion of the penalty once assessed

   The taxpayer cannot appeal or challenge the Chief Counsel's decision.

   R&TC 19774

2. Interest based penalty

   Why you received this penalty

   You entered into a transaction that did not have economic substance resulting in understatement.

   Visit R&TC 19774 for more information.

   Penalty

   100% of the interest payable on the additional tax for that transaction.

   Relief of penalty

   • 50% of the interest payable on the additional tax for that transaction reported on your amended return
   • 100% of the interest payable on the additional tax for that transaction not reported on your amended return

   R&TC 19777

3. Accuracy Related Penalty (ARP)

   Why you received this penalty

   You met one of the ground(s) under IRC Section 6662.

   Penalty

   • 20% of the underpayment of tax.
   • 40% of the underpayment of tax in certain circumstances.

   Visit Penalty Reference Chart (FTB 1024) for more information.

   Relief of penalty

   Visit IRC 6664 for more information.

   R&TC 19164

4. Reportable Transaction Accuracy Related Penalty

   Why you received this penalty

   You have additional tax related to a reportable or listed transaction.

   Penalty

   • 20% of the understatement
   • 30% of the understatement, if you did not report the transaction (IRC 6011)

   Relief of penalty

   Complete form Request for Chief Counsel to Relieve Penalties (FTB 626)

   • Attach a statement specifying the facts and reasons supporting the request for relief from the penalty
   • FTBs Chief Counsel may reduce all or a portion of the penalty once assessed

   The taxpayer cannot appeal or challenge the Chief Counsel's decision. Chief Counsel relief does not apply to listed transactions.

   R&TC 19164.5

5. Failure to disclose reportable and listed transaction penalty

   Why you received this penalty

   You met all of the following:

   • You participated in a reportable or listed transaction
   • You did not report it per R&TC 18407
   • Your taxable income is over $200,000

   Penalty

   Listed transaction

   $30,000 for each unreported listed transaction

   Relief does not apply to listed transactions.

   Reportable transaction (other than listed)

   $15,000 for each unreported reportable transaction

   Relief of penalty

   Complete form Request for Chief Counsel to Relieve Penalties (FTB 626)

   • Attach a statement specifying the facts and reasons supporting the request for relief from the penalty
   • FTBs Chief Counsel may reduce all or a portion of the penalty once assessed

   The taxpayer cannot appeal or challenge the Chief Counsel's decision.

   R&TC 19772