IRS Updates Adequate Disclosure Guidance

The IRS has updated guidance on how to make an adequate disclosure on an income tax return for purposes of reducing or eliminating a substantial understatement penalty and/or an unreasonable position return preparer penalty. This latest update applies to tax years beginning in 2017 and returns filed on 2017 tax forms, as well as to returns filed on 2017 forms for short tax years beginning in 2018.

Take away. The guidance has only made editorial changes and updates the tax years and forms to which, Rev. Proc. 2016-13 would apply. The IRS did not make additional substantive changes. The extent to which certain tax positions to be taken related to the Tax Cuts and Jobs Act need disclosure, however, was not addressed. Of particular concern for some taxpayers is the extent to which a disclosure in connection with taking an itemized deduction for the prepayment of 2018 property taxes within the 2017 tax year will be deemed sufficiently adequate to eliminate the imposition of penalties.

Adequate disclosure

Generally, a taxpayer must furnish all information required by the applicable forms and instructions. In addition, the amounts entered on the forms must be verifiable. Form 8275, “Disclosure Statement,” is generally used by taxpayers and preparers to disclose items or positions, except those taken contrary to a reg, that are not otherwise adequately disclosed on a return. Form 8275 is filed to avoid the portions of the accuracy-related penalty due to disregard of rules or to a substantial understatement of tax for a non-tax shelter item if the return position has a reasonable basis. Form 8275 is also used for disclosures relating to preparer penalties for understatements due to unreasonable positions or disregard of rules.

Unless otherwise provided, however, the IRS does not require disclosure of additional facts if the forms and attachments are clear and completed according to their instructions. However, if an entry may present a legal issue or controversy because of a related-party transaction, then that transaction and the relationship must be disclosed on Form 8275 or Form 8275-R, “Regulation Disclosure Statement.”

No penalty relief

Irrespective of disclosure, however a taxpayer meeting the disclosure requirements will not be entitled to a reduced accuracy-related penalty if the item or position on the return: