IRS releases 2001 guidelines for "adequate disclosure".

AuthorFiore, Nicholas J.
PositionSubstantial understatement of income tax

If Sec. 6662 applies to any portion of an underpayment of tax required to be shown on a return, an amount equal to 20% of the portion of the underpayment to which the section applies is added to the tax. (The penalty rate is 40% for certain gross valuation mis-statements.) Under Sec. 6662(b)(2), Sec. 6662 applies to the portion of an underpayment attributable to a substantial understatement of income tax.

Sec. 6662(d)(1) provides that there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10% of the amount of tax required to be shown on the return for the tax year or $5,000 ($10,000 in the case of a corporation other than an S corporation or a personal holding company). Sec. 6662(d)(2) defines an understatement as the excess of the amount of tax required to be shown on the return for the tax year over the amount of the tax shown on the return reduced by any rebate (within the meaning of Sec. 6211(b)(2)).

For an item not attributable to a tax shelter, Sec. 6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced by the portion of the understatement attributable to any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed on the return or on a statement attached to the return, and there is a reasonable basis for the tax treatment of such item by the taxpayer.

In general, this revenue procedure provides guidance in determining when disclosure is adequate for purposes of Sec. 6662(d). The taxpayer must furnish all required information in accordance with the applicable forms and instructions, and the money amounts entered on these forms must be verifiable.


Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under Sec. 6662(d), provided the forms and attachments are completed in a clear manner and in accordance with their instructions. The money amounts entered on the forms must be verifiable, and the information on the return must be disclosed in the manner described below. An amount is verifiable if, on audit, the taxpayer can demonstrate its origin (even if the IRS does not ultimately accept that amount) and the taxpayer can show good faith in entering it on the applicable form.

(1) Form 1040, Schedule A, Itemized Deductions:

(a) Medical and dental expenses...

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