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Treasury Regulations · 26 CFR

§ 1.6664-3. Ordering rules for determining the total amount of penalties imposed.

In effect eCFR current as of October 15, 2026

Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).

Regulation under 26 U.S.C. § 6664

Cite as 26 CFR § 1.6664-3

At a glance

Read from the text and its source citation. Not part of the regulation.

Status
In the current eCFR
Issued
December 31, 1991 by T.D. 8381
Last amended
February 20, 1992 by T.D. 8381
Issued under
26 U.S.C. § 6664
Length
949 words · about 4 min to read
Cross-references
cites 2 Code sections and 1 regulation; cited by 2
(a) In general. This section provides rules for determining the order in which adjustments to a return are taken into account for the purpose of computing the total amount of penalties imposed under sections 6662 and 6663, where—
(1) There is at least one adjustment with respect to which no penalty has been imposed and at least one with respect to which a penalty has been imposed, or
(2) There are at least two adjustments with respect to which penalties have been imposed and they have been imposed at different rates.

This section also provides rules for allocating unclaimed prepayment credits to adjustments to a return.

(b) Order in which adjustments are taken into account. In computing the portions of an underpayment subject to penalties imposed under sections 6662 and 6663, adjustments to a return are considered made in the following order:
(1) Those with respect to which no penalties have been imposed.
(2) Those with respect to which a penalty has been imposed at a 20 percent rate (i.e., a penalty for negligence or disregard of rules or regulations, substantial understatement of income tax, or substantial valuation misstatement, under sections 6662(b)(1) through 6662(b)(3), respectively).
(3) Those with respect to which a penalty has been imposed at a 40 percent rate (i.e., a penalty for a gross valuation misstatement under sections 6662 (b)(3) and (h)).
(4) Those with respect to which a penalty has been imposed at a 75 percent rate (i.e., a penalty for fraud under section 6663).
(c) Manner in which unclaimed prepayment credits are allocated. Any income tax withholding or other payment made before a return was filed, that was neither claimed on the return nor previously allowed as a credit against the tax liability for the taxable year (an “unclaimed prepayment credit”), is allocated as follows—
(1) If an unclaimed prepayment credit is allocable to a particular adjustment, such credit is applied in full in determining the amount of the underpayment resulting from such adjustment.
(2) If an unclaimed prepayment credit is not allocable to a particular adjustment, such credit is applied in accordance with the ordering rules set forth in paragraph (b) of this section.
(d) Examples. The following examples illustrate the rules of this § 1.6664-3. These examples do not take into account the reasonable cause exception to the accuracy-related penalty under § 1.6664-4.
Example 1.

A and B, husband and wife, filed a joint federal income tax return for calendar year 1989, reporting taxable income of $15,800 and a tax liability of $2,374. A and B had no amounts previously assessed (or collected without assessment) and no rebates had been made. Subsequently, the return was examined and the following adjustments and penalties were agreed to:

Adjustment #1 (No penalty imposed)$1,000
Adjustment #2 (Substantial understatement penalty imposed)40,000
Adjustment #3 (Civil fraud penalty imposed)45,000
Total adjustments$86,000
Taxable income shown on return15,800
Taxable income as corrected$101,800
Computation of underpayment:
Tax imposed by subtitle A$25,828
Tax shown on return$2,374
Previous assessmentsNone
RebatesNone
Balance$2,374
Underpayment$23,454

Computation of the portions of the underpayment on which penalties under section 6662(b)(2) and section 6663 are imposed:

Step 1 Determine the portion, if any, of the underpayment on which no accuracy-related or fraud penalty is imposed:

Taxable income shown on return$15,800
Adjustment #11,000
“Adjusted” taxable income$16,800
Tax on “adjusted” taxable income$2,524
Tax shown on return2,374
Portion of underpayment on which no penalty is imposed$150

Step 2 Determine the portion, if any, of the underpayment on which a penalty of 20 percent is imposed:

“Adjusted” taxable income from step 1$16,800
Adjustment #240,000
“Adjusted” taxable income56,800
Tax on “adjusted” taxable income$11,880
Tax on “adjusted” taxable income from step 1$2,524
Portion of underpayment on which 20 percent penalty is imposed$9,356

Step 3 Determine the portion, if any, of the underpayment on which a penalty of 75 percent is imposed:

Total underpayment$23,454
Less the sum of the portions of such underpayment determined in:
Step 1$150
Step 29,356
Total$9,506
Portion of underpayment on which 75 percent penalty is imposed$13,948
Example 2.

The facts are the same as in Example 1 except that the taxpayers failed to claim on their return a credit of $1,500 for income tax withheld on unreported additional income that resulted in Adjustment #2. Because the unclaimed prepayment credit is allocable to Adjustment #2, the portion of the underpayment attributable to that adjustment is $7,856 ($9,356—$1,500). The portions of the underpayment attributable to Adjustments #1 and #3 remain the same.

Example 3.

The facts are the same as in Example 1 except that the taxpayers made a timely estimated tax payment of $1,500 for 1989 which they failed to claim (and which the Service had not previously allowed). This unclaimed prepayment credit is not allocable to any particular adjustment. Therefore, the credit is allocated first to the portion of the underpayment on which no penalty is imposed ($150). The remaining amount ($1,350) is allocated next to the 20 percent penalty portion of the underpayment ($9,356). Thus, the portion of the underpayment that is not penalized is zero ($150—$150), the portion subject to a 20 percent penalty is $8,006 ($9,356—$1,350) and the portion subject to a 75 percent penalty is unchanged at $13,948.

[T.D. 8381, 56 FR 67507, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 1992]

Other regulations under § 6664

Cross-references

Computed from the citations in the text of 26 CFR.

Code sections it cites

Regulations it cites

Cited by 2 other regulations

Amendment history

From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.

  1. Amended by T.D. 8381 (57 FR 6165)
  2. Issued by T.D. 8381 (56 FR 67507)

Where it sits in 26 CFR

  1. Subchapter A Income tax
  2. Part 1 Income taxes
  3. Additions to the tax, additional amounts, and assessable penalties

Nearby sections