The “economic deterrence” model of tax compliance suggests that higher or more certain penalties should produce more compliance. This study aims to explore the extent to which taxpayers respond to the substantial understatement penalty.
An accuracy-related penalty applies to various understatements, including “substantial” understatements and those due to negligence. If the understatement exceeds the substantial understatement threshold, a penalty applies even if the IRS does not determine the taxpayer was negligent.
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