Instructions for Form 8275-R (2/2006)

General Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Section references are to the Internal Revenue Code unless otherwise noted.

Purpose of Form

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 for non-tax shelter items 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.
Disregard of rules.
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.
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.

Who Should File

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.

How To File

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. Carryover items must be disclosed in the tax year in which they originated. You do not have to file another Form 8275-R for those items for the tax years in which the carryover is taken into account.

Carryback items must be disclosed for the tax year in which they originated. You do not have to file another Form 8275-R for those items for the tax years in which the carryback is taken into account.

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.

If you are disclosing a position that is contrary to a regulation, and the position relates to a reportable transaction as defined in Regulations section 1.6011-4(b), you must also make the disclosure required by Regulations section 1.6011-4(b). See Form 8886, Reportable Transaction Disclosure Statement, its instructions, and Rev. Proc. 2004-45, which is on page 140 of Internal Revenue Bulletin 2004-31 at http://www.irs.gov/pub/irs-irbs/irb04-31.pdf.

Accuracy-Related Penalty

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 of the Internal Revenue Code,
Any substantial overstatement of pension liabilities, or
Any substantial estate or gift tax valuation understatement.

However, the penalty is 40% of any portion of a tax underpayment attributable to one or more gross valuation misstatements in (3), (4), or (5) above if the applicable dollar limitation under section 6662(h)(2) is met.

Reasonable basis. 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. To avoid the disregard of regulations portion of the accuracy-related penalty, the position taken must also represent a good-faith challenge to the validity of the regulation. Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable.

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.

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 tax years beginning after October 22, 2004, an understatement of a corporation (other than an S corporation or a personal holding company) is substantial if it exceeds the lesser of:

10% of the tax required to be shown on the return for the tax year (or, if greater, $10,000), or
$10,000,000.

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 the following items.

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. (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.)
A tax shelter item (other than a corporate tax shelter item), for tax years ending before October 23, 2004, 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.

For corporate tax shelter transactions (and for tax shelter items of other taxpayers for tax years ending after October 22, 2004), the only exception to the substantial understatement portion of the accuracy-related penalty is the reasonable cause exception. For more details, see 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, with a significant purpose to avoid or evade federal income tax. For transactions on or before August 5, 1997, a tax shelter is a partnership or other entity, plan, or arrangement, whose principal purpose is 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,
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.

A preparer is not considered to have recklessly or intentionally disregarded a regulation if the position is adequately disclosed, is not frivolous, and the position represents a good faith challenge to the validity of the regulation.

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.