Section references are to the Internal Revenue Code unless otherwise noted.
Form 8275-R is used by taxpayers and income tax preparers to disclose positions taken on a tax return that are contrary to
Treasury regulations.
The form is filed to avoid the portions of the accuracy-related penalty due to disregard of regulations or to a substantial
understatement of income
tax if the return position has a reasonable basis. It can also be used for disclosures relating to the preparer penalties
for income tax
understatements due to positions taken contrary to regulations.
The portion of the accuracy-related penalty attributable to the following types of misconduct cannot be avoided by disclosure
on Form 8275-R:
- Negligence
- Substantial understatement of tax on a tax shelter item.
- Substantial valuation misstatement under chapter 1.
- Substantial overstatement of pension liabilities.
- Substantial estate or gift tax valuation understatements.
Because of the importance to the self-assessment system of disclosing positions contrary to regulations, the requirements
for making such
disclosures are stringent:
- The disclosure is adequate only if it is made separately on a Form 8275-R, and
- The penalty for reckless or intentional disregard of a regulation may be avoided by disclosure only if the position represents
a good faith
challenge to the validity of the regulation and has a reasonable basis.
Instead of Form 8275-R, use Form 8275, Disclosure Statement, for the disclosure of items or positions which are not contrary to
regulations but which are not otherwise adequately disclosed.
Form 8275-R is filed by individuals, corporations, pass-through entities, and income tax return preparers.
For items attributable to a pass- through entity, disclosure should be made on the tax return of the entity. If the entity
does not make the
disclosure, the partner (or shareholder, etc.) may make adequate disclosure of these items.
When a return position is contrary to regulations, you must file Form 8275-R. File all Forms 8275-R with your original tax
return. Keep a copy for
your records. You also may be able to file Forms 8275-R with an amended return. See Regulations sections 1.6662-4(f) and 1.6664-2(c)(3)
for more
information.
To make adequate disclosure for items reported by a pass-through entity, you must complete and file a separate Form 8275-R
for items reported by
each entity.
Carrybacks, carryovers, and recurring items.
If you disclose
carryover items on a return for the year they arose, you do not have to file another Form 8275-R for those items for the
carryover tax years.
If you disclose
carryback items on a return for the year the carryback originated, you do not have to file another Form 8275-R for those
items for the carryback years.
However, if you disclose items that are of a
recurring nature (such as depreciation expense), you must file Form 8275-R for each tax
year in which the item occurs.
Generally, the accuracy-related penalty is 20% of any portion of a tax underpayment attributable to:
- Negligence or disregard of rules or regulations.
- Substantial understatement of income tax.
- Any substantial valuation misstatement under chapter 1.
- Any substantial overstatement of pension liabilities.
However, the penalty is 40% of any portion of a tax underpayment attributable to one or more gross valuation misstatements
in 3 and 4 above if the
applicable dollar limitation under section 6662(e)(2) is met.
Generally, you can avoid the disregard of regulations and substantial understatement portions of the accuracy-related penalty
if the position is
adequately disclosed and the position has at least a reasonable basis. Reasonable basis is a significantly higher standard
than the not
frivolous standard applicable to preparers. See Regulations section 1.6694-2(c)(2).
The penalty will not be imposed on any part of an underpayment if there was reasonable cause for your position and you acted
in good faith in
taking that position.
If you failed to keep proper books and records or failed to substantiate items properly, you cannot avoid the penalty by disclosure.
Also, you
cannot avoid the penalty by disclosure if the position is frivolous.
Substantial Understatement
An understatement is the excess of:
- The amount of tax required to be shown on the return for the tax year, over
- The amount of tax shown on the return for the tax year, reduced by any rebates.
There is a substantial understatement of income tax if the amount of the understatement for any year 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 as defined in section 542).
For purposes of the substantial understatement portion of the accuracy-related penalty, the amount of the understatement will
be reduced by the
part that is attributable to:
Note.
In no event will a corporation be treated as having a reasonable basis for its tax treatment of an item attributable to a
multi-party financing
transaction entered into after August 5, 1997, if the treatment does not clearly reflect the income of the corporation.
- An item (other than a tax shelter item) for which there was substantial authority for the treatment claimed at the time the
return was filed
or on the last day of the tax year to which the return relates.
- An item (other than a tax shelter item) that is adequately disclosed on this form if there is a reasonable basis for the tax
treatment of the item.
- A tax shelter item (other than a corporate tax shelter item) if (a) there was substantial authority for the treatment at the time
the return was filed or on the last day of the tax year to which the return relates and (b) you reasonably believed that the tax treatment
of the item was more likely than not the proper tax treatment.
Note.
For corporate tax shelter transactions occurring after December 8, 1994, the only exception to the substantial understatement
portion of the
accuracy-related penalty is the reasonable cause exception. See Regulations section 1.6664-4(e).
Tax shelter items.
A tax shelter, for purposes of the substantial understatement portion of the accuracy-related penalty, is a partnership
or other entity, plan, or
arrangement, whose principal purpose is to avoid or evade Federal income tax. For transactions after August 5, 1997, a tax
shelter is a partnership or
other entity, plan, or arrangement, with a
significant purpose to avoid or evade Federal income tax.
A tax shelter item is any item of income, gain, loss, deduction, or credit that is directly or indirectly attributable
to the principal or
significant purpose of the tax shelter to avoid or evade Federal income tax.
Income Tax Return Preparer Penalties
A preparer who files an income tax return or claim for refund is subject to a $250 penalty for taking a position which understates
any part of the
liability if:
- The position has no realistic possibility of being sustained on its merits, and
- The preparer knew (or reasonably should have known) of the position, and
- The position is frivolous or not adequately disclosed on the return or on the appropriate disclosure statement.
The penalty will not apply if it can be shown that there was reasonable cause for the understatement and that the preparer
acted in good faith.
In cases where any part of the understatement of the liability is due to a willful attempt by the return preparer to understate
the liability, or
if the understatement is due to reckless or intentional disregard of rules or regulations by the preparer, the preparer is
subject to a $1,000
penalty.
The preparer penalties under section 6694 generally may be avoided if a position is sufficiently disclosed and is not frivolous.
Note.
For more information about the accuracy-related penalty and preparer penalties, and the means of avoiding these penalties,
see Regulations sections
1.6662, 1.6664, and 1.6694.
