TC 350: Negligence Penalty

What the code actually does

IRS Document 6209 (the IRS’s reference guide to its data-processing codes) defines TC 350 simply as "Negligence Penalty," valid across a wide range of document codes, with the remark: "Assesses all types of negligence penalties." It is a debit — it adds the penalty amount to the module (the record for one tax type and period) balance — and it can apply on both individual and business accounts.

For the pre-1990 returns TC 350 covers, the governing statute was former IRC §6653(a), since repealed, which set the penalty at 5% of the underpayment due to negligence (IRM 20.1.1, Exhibit 20.1.1-3). For returns due after December 31, 1989, negligence falls under IRC §6662(b)(1), one of several distinct triggers for the broader accuracy-related penalty, and posts as TC 240 with penalty reference number 786. Reference number 680 applies instead to assessments the IRS entered before 2015, to court-ordered assessments, and to cases where the penalty is for substantial understatement and negligence is a secondary consideration (Doc 6209, Section 10; IRM 20.1.5.4.3). IRM 20.1.5, Return Related Penalties, addresses negligence under section 20.1.5.8, "IRC 6662(b)(1) and IRC 6662(c), Negligence or Disregard of Rules or Regulations," with its own subsection, 20.1.5.8.1, devoted to negligence specifically.

Negligence is a specific legal standard, not a catch-all

IRC §6662(c) defines negligence to include "any failure to make a reasonable attempt to comply with" the tax laws, and disregard to include "any careless, reckless, or intentional disregard" of rules or regulations. That is a factual, case-specific standard — it asks whether the taxpayer's conduct in preparing the return was reasonable, not simply whether the return turned out to be wrong.

This distinguishes negligence from the other accuracy-related penalty components IRC §6662 authorizes, each with its own separate test: substantial understatement of tax under §6662(b)(2), and substantial or gross valuation misstatement under §6662(b)(3). The IRS chooses which theory to assert based on the facts, and the theory it picks determines what defenses are actually available.

What this means for the account

A TC 350 on the transcript means the IRS determined the taxpayer's underpayment resulted from negligence or disregard of the rules, not from an innocent, reasonable position that simply turned out to be wrong. Doc 6209 says TC 350 should only be used for returns due before January 1, 1990. For later returns the negligence penalty posts as TC 240 with penalty reference number 786, or 680 in the cases above (substantial understatement alone is 787).

On those later returns, reasonable cause is the primary defense to any accuracy-related penalty, including negligence — but the defense itself lives in a different statute than the one that creates the penalty. IRC §6664(c) states that "no penalty shall be imposed under section 6662... with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion." A taxpayer who meets that standard is not liable for the penalty even if the position was ultimately wrong. The determination is fact-specific rather than a checklist: the taxpayer's own effort to assess the correct tax liability carries the most weight, and factors like the taxpayer's experience, knowledge, and education bear on whether an honest misunderstanding was reasonable. Reliance on a preparer's advice does not automatically establish reasonable cause either — it only counts if that reliance was itself reasonable under the circumstances, not simply invoked as a shield. Whether the defense applies depends heavily on the specific facts behind the return, which is why the underlying examination file, not just the transcript code, is where the real analysis has to happen.

What people mistake TC 350 for

TC 350 is easy to conflate with civil fraud penalties, but the two rest on entirely different legal standards and carry very different consequences. TC 320, the civil fraud penalty, requires the IRS to prove fraudulent intent by clear and convincing evidence and carries a 75% penalty rate — a materially higher bar and a materially higher cost than a negligence penalty under a reasonableness standard.

Negligence is also not the same as the other IRC §6662 components. A return can trigger a substantial-understatement penalty without any negligence finding at all, since that trigger is purely mathematical (the understatement exceeds a statutory threshold) rather than conduct-based. Seeing "accuracy-related penalty" language does not tell you which IRC §6662 subsection applies. On current returns the penalty reference number under TC 240 tells you. Reference number 680 is the exception: it covers the cases listed above and does not identify the subsection.

What to do next

Confirm the return’s due date first: Doc 6209 says TC 350 should only be used for returns due before January 1, 1990, and a later negligence penalty should appear as TC 240 with reference number 786 or 680.

Ask the examiner or Appeals for the specific factual basis the IRS cited for the negligence determination, and for any written supervisory approval in the examination file. For an open examination, IRM 4.2.5.6 tells examiners to give the taxpayer and representative a copy of the file on request, to the extent release would not impair tax administration, and says the taxpayer and representative need no Freedom of Information Act (FOIA) request to get copies of an open examination case file.

Evaluate a reasonable-cause defense before conceding the penalty — good-faith reliance on a preparer, a genuine ambiguity in the law, or reasonable reliance on erroneous information can all support abatement.

Run the account history the client supplies through the IRS Transcript Decoder to see whether TC 351 has already partially abated the assessment before advising on next steps.