Yes on the understatement of income penalty.  Original notice had them paying about $17,000 in tax, 1040-x was about $5,600.  BUT, (just looked up)  the instructions for 1040-X specifically state that if filed after the normal due date, do not calculate penalties and interest, the IRS will adjust accordingly (see also Topic 308 Amended returns, Balance Due).  I have 2 other crazy notices like this where e-filed amended returns are being ignored despite the taxpayer having every right to file one.  You can't reject an amended return based on not calculating penalties since the instructions say not to do that.  Someone just does not want to do the adjustment.  Having a crazy off-season of IRS missed tax payments, estimated payments not being credited, and other time killing notices.  To be frank, have not had any kind of a real "off-season" in 3 years.