Disclosure statement filed with return.

• Author: Ely, Mark H.
• Position: Tax practitioners; frivolous claims

Sec. 6694 generally imposes a penalty on a return preparer if any part of a liability understatement in a return or refund claim is based on a position that did not have a realistic possibility of being sustained on its merits and the preparer knew (or reasonably should have known). The penalty is $250, unless there is reasonable cause for the understatement and the preparer acted in good faith.

Regs. Sec. 1.6694-2(b) provides that the realistic-possibility-of-success standard is met if a reasonable and well-informed analysis by a tax adviser would lead to the conclusion that a position has approximately a one-in-three (or greater) likelihood of being sustained on its merits.

The $250 penalty will not be imposed even though a position does not have a realistic possibility of being sustained, if it is not frivolous and is adequately disclosed. Under Regs. Sec. 1.6694-2(c) (2), a frivolous position is one that is patently improper.

Adequate disclosure generally occurs if made on Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement. The latter form is used to disclose a return position contrary to regulations. Form 8275 is used for all other disclosures. Either form is filed with the original or amended return or refund claim.

In certain circumstances, disclosure may be made on a return pursuant to the IRS's annual revenue procedure, which will be considered adequate to avoid the preparer penalty. Rev. Proc. 99-41 is currently in effect for 1999 returns. Additional disclosure is unnecessary for any issue listed in the procedure, provided the forms and attachments are completed in a clear manner and in accordance with the applicable instructions. The figures on the forms must be verifiable. A number is considered verifiable if, on examination, a taxpayer can show its origin and that he acted in good faith...