In the early 1980's, Congress faced the mounting problems of tax shelters and other forms of tax avoidance. It responded by passing a series of laws.1 One of these provisions, section 6661 of the Internal Revenue Code, penalizes "substantial understatement" of tax liability.2 While section 6661 may appear to be a typical, innocuous tax code provision, close examination reveals that the substantial understatement penalty threatens to expand quietly the power of the Internal Revenue Service (IRS) over taxpayers, violating the spirit of the Administrative Procedure Act (APA) in the process.

Section I of this Note explores the background of section 6661 and its interpretation by the Department of Treasury. Section II explains the first problem with the Regulation, namely the compulsion of taxpayer deference to IRS interpretative rules. Section III discusses how Treasury's interpretation of 6661 limits the authorities that taxpayers may cite to avoid the penalty, excluding some authorities that taxpayers may refer to when they are trying to escape substantive tax liability. Section IV explores whether the proposed solutions could come from courts or whether they must emanate from Congress. The deference courts pay to administrative agencies suggests that judicial adoption of this Note's proposed reading might be precluded. This conclusion might provide impetus to Congress to revisit not only the words of section 6661 but also the issue of judicial deference to administrative agencies generally.