IRS releases 2003 guidelines for "adequate disclosure".

• Author: O'Driscoll, David

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 misstatements.) 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.

Sec. 6694 imposes a penalty of $250 on an income tax return preparer for filing a return or claim for refund that results in an understatement of liability due to a position for which the preparer knew or should have known that there was not a realistic possibility of being sustained on the merits and such position was not disclosed in accordance with Sec. 6662(d)(2)(B)(ii).

In general, this revenue procedure provides guidance in determining when disclosure is adequate for purposes of Sec. 6662(d)(2)(B)(ii) and 6694(a)(3). 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.

Procedure

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 that the forms and attachments are completed in a clear manner and in accordance with their instructions. The money amounts entered on...