IRS releases 2004 guidelines for "adequate disclosure".

• Author: O'Driscoll, David

In general, Rev. Proc. 200473 provides guidance in determining when disclosure is adequate for purposes of Secs. 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.

Law

If Sec. 6662 applies to any portion of an underpayment of tax required to be shown on a return, 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 understatement exceeds the greater of 10% of the tax required to be shown on the return for the tax year, or $5,000 ($10,000 for a corporation other than an S corporation or a personal holding company). Sec. 6662(d)(2) defines an understatement as the excess of" the tax required to be shown on the return for the tax year, over 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 understatement is reduced by the portion attributable to any item if the relevant facts affecting the item's tax treatment are adequately disclosed on the return or on a statement attached to the return, and a reasonable basis exists for the item's tax treatment by the taxpayer.

Sec. 6694 imposes a $250 penalty on a return preparer for filing a return or refund claim 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).

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 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...