IRS severely limits methods of disclosure.

• Author: Ely, Mark H.

The final regulations under Secs. 6662 and 6694 severely limit the methods of disclosure that the Service will consider acceptable. The regulations state that to constitute adequate disclosure, the following rules apply.

Substantial understatement

(two exclusive methods)

1. Use Form 8275, Disclosure Statement, or, if it is a position contrary to a regulation, Form 8275-R, Regulation Disclosure Statement. (Until Form 8275-R is available, the preamble to the Sec. 6662 regulations requires that taxpayers must disclose positions contrary to regulations on a separate Form 8275 with the caption "regulations" appearing in the upper right hand corner of the form.)

2. The annual revenue procedure, currently Rev. Proc. 92-23. This revenue procedure identifies circumstances in which completion of certain forms and schedules in an income tax return will constitute adequate disclosure.

   Thus, a captioned disclosure statement (in accordance with old Regs. Sec. 1.6661-4) is no longer acceptable.

   Negligence or disregard

   of rules or regulations

   (one exclusive method)

1. Use Form 8275 or Form 8275-R (if regulation is involved). Note: No annual revenue procedure or captioned disclosure statement is acceptable.

   To take a position contrary to a rule or regulation (which the Service has defined to include revenue rulings and notices published in the Internal Revenue Bulletin), the regulatory provision or ruling in question must be identified on the appropriate Form 8275. Note: If the taxpayer is taking a position contrary to a revenue ruling or notice, the penalty will not be imposed if the taxpayer has a realistic possibility of being sustained on the merits. In such a case, no disclosure would be required.

   Substantial (or gross)

   valuation misstatements

   No disclosure exception is available

   Preparer penalties

   - income tax return

   or claim for refund

   * Sec. 6694(a): understatements due to unrealistic positions (two exclusive methods). 1. Use Form 8275 or Form 8275-R; or 2. The annual revenue procedure. (No captioned disclosure statement is acceptable.)

   * Sec. 6694(b): willful understatement or reckless or intentional disregard of rules or regulations (one exclusive method). Use Form 8275 or Form 8275-R.

   The regulations impose an additional requirement for a preparer to avoid the reckless or intentional disregard of rules or regulations penalty if the position is contrary to a regulation. In addition to the Form 8275-R that must be filed, the preparer must demonstrate...