Proper disclosure for disclosed positions

Section 1.6694-2(c)(1) of the Temporary Regulations states that the §6694(a) penalty will not be imposed on a tax return preparer if the position taken has a “reasonable basis” and is adequately disclosed.

The “disclosure rules” are defined in § 1.6694-2(c)(3). Paragraph (c)(3) has disclosure rules for signing tax return preparers and non-signing tax return preparers.

Disclosure by signing tax return perparers – described in subparagraph (c)(i)

Section 1.6694-2(c)(3)(i)(A) permits disclosure on Form 8275 or Form 8275-R “Disclosure Statement” or in accordance with the annual revenue procedure described in § 1.662-4(f)(2) of the regulations. The current procedure is found in Rev. Proc. 2008-14, I.R.B. 2008-7, January 25, 2008.

The disclosure may be made to the taxpayer (the signed return preparer’s client) with the prepared tax return including the Form 8275 or Form 8275-R or for disclosure on the taxpayer’s return under the guidelines and limitations of Rev. Proc. 2008-14. Thus, either the tax return preparer or the taxpayer can make the appropriate disclosure.

There is proper disclosure if the tax return preparer advises the taxpayer of all of the section 6662 penalty standards that apply to the taxpayer (as the result of the disclosure) and contemporaneously documents that advice, there is proper disclosure under § 1.6694-2(c)(3)(C) if the disclosed position meets the “substantial authority” standards for income tax returns under § 6662(d)(2)(B)(i).

Section 1.6694-2(c)(3)(i)(D) documents adequate disclosure to the taxpayer that the position taken is a reportable tax shelter reportable items with a significant purpose of tax avoidance or tax evasion is proper disclosure if the tax return preparer advises the taxpayer that disclosure will not protect the taxpayer if the disclosure if contemporarily documented and that the taxpayer must have minimum substantial authority and the belief that the position taken meets the more likely than not standard.

Section 1.6694-2(c)(3)(i)(E) also provide that there is adequate disclosure to taxpayer of the applicable penalty standards for claims for refund subject to the section 6692 penalty, other than the substantial understatement penalty.

COMMENT

To put this into perspective, the “reasonable basis” standard applied to disclosed positions provided the disclosure is adequate. The easiest form of permitted disclosure to avoid the section 6694 penalty is through the use of Form 8275 or Form 8275-R to be filed as part of taxpayer’s original tax return. Since the taxpayer signs the tax return it is hard to understand why the other far more complex disclosure rules (i.e., disclosure to taxpayer without the Forms 8275) should be elected. This is not a close issue; the other disclosures without Form 8275 have multiple subjective standards that are traps for the unwary tax return preparers. Commons sense suggests the used of the Forms 8275 for disclosure while also advising the taxpayer that he will be scrutinized for the section 6662 negligence penalties as a result of the disclosure. Obviously, the purpose of the temporary regulations and the tax policy is to discourage tax return preparers and taxpayers from taking positions that would require disclosure.