Recent changes to accuracy-related penalty rules.

• Author: Grieger, Steven I.

In past months, changes were made to the accuracy-related penalty rules as a result of new legislation and changes in IRS procedure.

Rev. Proc. 94-69 modifies penalty-avoidance procedures for Coordinated Examination Program (CEP) taxpayers. The revenue procedure, effective Oct. 31, 1994, supersedes Rev. Proc. 85-26 to reflect amendments to Sec. 6662 and the repeal of Sec. 6661. The primary purpose of the revenue procedure is to outline disclosure procedures taxpayers subject to the CEP must follow to avoid understatement of tax penalties under former Sec. 6661 and the accuracy-related penalties of Sec. 6662. The revenue procedure generally provides CEP taxpayers with a more definitive "deadline" for furnishing adequate disclosure regarding an item or position.

Former rules

Rev. Proc. 85-26 provided special procedures for CEP taxpayers to make adequate disclosure with respect to an item. Generally, a CEP taxpayer could file a qualified amended return with disclosure within 10 days after the earliest of (1) receiving a written confirmation of a meeting, (2) formally meeting with the examining agent for the first time with respect to the examination of the relevant tax year or (3) receiving an Information Document Request for that year. A qualified amended return for purposes of Rev. Proc. 85-26 was a written statement (not a Form 1120X, Amended U.S. Corporation Income Tax Return) which included, among other things, a description of the item and a perjury declaration submitted to the revenue agent responsible for examining the return.

Although Rev. Proc. 85-26 provided for a 10-day qualified amended return window for CEP taxpayers, the period may have started unexpectedly, and expired if the taxpayer did not keep close tabs on when the first IRS contact occurred. This was complicated further in the case of a taxpayer under continuous audit (a common occurrence for taxpayers under the CEP).

New rules

To avoid imposition of the Sec. 6662(b)(1) penalty for negligence or disregard of rules or regulations and the Sec. 6662(b)(2) substantial understatement penalty, a CEP taxpayer must furnish a specific written statement to the requesting IRS official. This statement will be treated as a qualified amended return if the written statement (1) is furnished after the tax return has been filed but no later than 15 days (with a possible extension if reasonable cause can be shown) from the date of written notice from the Service to the taxpayer requesting...