While it often seems as if IRS rules and regulations are black and white, leaving little room for interpretation, that's not the case. Whenever Congress passes new legislation, much is often left open to interpretation, particularly if the IRS doesn't have time to develop revenue procedures quickly. Rather than simply hope that we're doing it right and cross our fingers, we can develop tax positions with little guidance and still protect ourselves from liability if we explain the position to the IRS and have a “reasonable basis” for the tax position. We use Disclosure Statement, Form 8275, a nifty IRS penalty defense weapon, to explain these positions. With the wide range of changes to the tax code due to COVID-19 pandemic legislation, many of which have no authoritative tax guidance, it's time to take a look at how to protect yourself from accuracy-related tax penalties.
Disclosure Statement, Form 8275
Taxpayers and tax preparers use Disclosure Statement, Form 8275, to keep themselves out of trouble. We use this form to disclose tax positions that the tax return doesn't adequately reveal or explain to avoid penalties. If the Disclosure Statement reveals a reasonable basis for a tax reporting position, it can:
- Protect a taxpayer from an accuracy-related penalty that's the result of substantially understating income tax for non-tax shelter items,
- Remove exposure to a 40% penalty for transactions “lacking in economic substance” and
- Protect a tax preparer from penalties for tax understatements resulting from unreasonable positions or disregarding the rules.
With new COVID-19 tax legislation, we have a breadth of new, hazy tax provisions that aren't clear. In many cases, if we are uncertain about tax treatment for a new provision, the IRS will consider it disclosed if it's properly entered on a return. But if the IRS's revenue procedures don't clear up the uncertainty, it seems safest to use a disclosure statement on Form 8275 to avoid a dispute with the IRS down the line.
If you're facing tax preparation uncertainty in the wake of tax regulations stemming from the new Coronavirus tax relief bills, it's time to discuss the matter with an experienced tax professional. You don't have to unravel new IRS regulations, disclosure statements, and revenue procedures on your own. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.