provided by: 
This penalty is really composed of two alternative penalties. The first is the negligence prong and the second is the disregard of the rules and regulations prong.
- "Negligence"
- "Disregard of rules & regulations"
"Negligence"
"Negligence" includes (but is not limited to) any failure:
- (1) to make a reasonable attempt to comply with the internal revenue laws;
- (2) to exercise ordinary and reasonable care in preparation of a tax return; or
- (3) to keep adequate books and records or to substantiate items properly.
Moreover, taking a position on your return that has a reasonable basis is not negligence. The IRS will typically find negligence if a taxpayer (1) fails to include on an income tax return income reported on an information return (such as an IRS Form 1099) or (2) fails to make a reasonable attempt to ascertain the correctness of a deduction, credit, or exclusion that would seem to a reasonable person to be "too good to be true".
"Disregard of rules & regulations"
This prong may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations - by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect.
Adequate disclosure on your tax return is not a defense against the negligence prong of the penalty, but may be a defense against the disregard prong. However, disclosure alone is not enough - you must show that there was a reasonable basis for the position.
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