.01 If section 6662 applies to any portion of an underpayment of tax
required to be shown on a return, an amount equal to 20 percent of the portion
of the underpayment to which the section applies is added to the tax. (The
penalty rate is 40 percent in the case of gross valuation misstatements under
section 6662(h).) Section 6662(b)(2) applies to the portion of an underpayment
of tax that is attributable to a substantial understatement of income tax.
.02 Section 6662(d)(1) provides that there is a substantial understatement
of income tax if the amount of the understatement exceeds the greater of 10
percent of the amount of tax required to be shown on the return for the taxable
year or $5,000. Section 6662(d)(1)(B) provides special rules for corporations.
A corporation (other than an S corporation or personal holding company) has
a substantial understatement of income tax if the amount of the understatement
exceeds the lesser of 10 percent of the tax required to be shown on the return
for a taxable year (or, if greater, $10,000) or $10,000,000. Section 6662(d)(2)
defines an understatement as the excess of the amount of tax required to be
shown on the return for the taxable year over the amount of the tax that is
shown on the return reduced by any rebate (within the meaning of section 6211(b)(2)).
.03 In the case of an item not attributable to a tax shelter, section
6662(d)(2)(B)(ii) provides that the amount of the understatement is reduced
by the portion of the understatement attributable to any item with respect
to which the relevant facts affecting the item’s tax treatment are adequately
disclosed in the return or in a statement attached to the return, and there
is a reasonable basis for the tax treatment of the item by the taxpayer.
.04 Section 6694 imposes a penalty of $250 on an income tax return preparer
for filing a return or claim for refund that results in an understatement
of liability due to a position for which the preparer knew or should have
known that there was not a realistic possibility of being sustained on the
merits and the position was not disclosed in accordance with section 6662(d)(2)(B)(ii).
.05 In general, this revenue procedure provides guidance for determining
when disclosure is adequate for purposes of section 6662(d)(2)(B)(ii) and
section 6694(a)(3). For purposes of this revenue procedure, the taxpayer
must furnish all required information in accordance with the applicable forms
and instructions, and the money amounts entered on these forms must be verifiable.
Annual guidance under Treas. Reg. § 1.6662-4(f)(2) and Treas. Reg.
§ 1.6694-3(e)(1) and (2) for returns filed on 2005, 2004, and 2003
tax forms is provided in Rev. Proc. 2005-75, Rev. Proc. 2004-73, 2004-2 C.B.
999, and Rev. Proc. 2003-77, 2003-2 C.B. 964, respectively.
.06 Fiscal and short tax year returns. (a) In general. This revenue
procedure may apply to a return for a fiscal tax year that begins in 2006
and ends in 2007. This revenue procedure may also apply to a short year return
for a period beginning in 2007 where the return is to be filed before the
2007 forms are available. (Note that individuals are generally not put in
this position as a decedent’s final return for a fractional part of
a year is due the fifteenth day of the fourth month following the close of
the12-month period which began with the first day of such fractional part
of the year. See Treas. Reg. section 1.6072-1(b).)
In the case of fiscal year and short year returns, the taxpayer must take
into account any tax law changes that are effective for tax years beginning
after December 31, 2006, even though these changes are not reflected on the
form.
(b) Tax law changes effective after December 31, 2006. This document
does not take into account the effect of tax law changes effective for tax
years beginning after December 31, 2006. If a line referenced in this revenue
procedure is affected by such a change and requires additional reporting,
a taxpayer may have to file Form 8275, Disclosure Statement,
or Form 8275-R, Regulation Disclosure Statement, until
the Service prescribes criteria for complying with the requirement.
.01 General.
(1) Additional disclosure of facts relevant to, or positions taken with
respect to, issues involving any of the items set forth below is unnecessary
for purposes of reducing any understatement of income tax under section 6662(d)
(except as otherwise provided in section 4.02(3) concerning Schedules M-1
and M-3), provided that the forms and attachments are completed in a clear
manner and in accordance with their instructions.
(2) The money amounts entered on the forms must be verifiable, and the
information on the return must be disclosed in the manner described below.
For purposes of this revenue procedure, a number is verifiable if, on audit,
the taxpayer can demonstrate the origin of the number (even if that number
is not ultimately accepted by the Internal Revenue Service) and the taxpayer
can show good faith in entering that number on the applicable form.
(3) The disclosure of an amount as provided in section 4.02 below is
not adequate when the understatement arises from a transaction between related
parties. If an entry may present a legal issue or controversy because of
a related party transaction, then that transaction and the relationship must
be disclosed on a Form 8275, Disclosure Statement, or
Form 8275-R, Regulation Disclosure Statement.
(4) Where the amount of an item is shown on a line that does not have
a preprinted description identifying that item (such as on an unnamed line
under an “Other Expense” category) the taxpayer must clearly identify
the item by including the description on that line. For example, to disclose
a bad debt for a sole proprietorship, the words “bad debt” must
be written or typed on the line of Schedule C that shows the amount of the
bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other income
(loss) items with differences, or Part III, line 35, Other expense/deduction
items with differences, the entry must provide descriptive language; for example,
“Cost of non-compete agreement deductible not capitalizable.”
If space limitations on a form do not allow for an adequate description,
the description must be continued on an attachment.
(5) Although a taxpayer may literally meet the disclosure requirements
of this revenue procedure, the disclosure will have no effect for purposes
of the section 6662 accuracy-related penalty if the item or position on the
return: (1) Does not have a reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3);
(2) Is attributable to a tax shelter item as defined in section 6662(d)(2)
and Treas. Reg. § 1.6662-4(g); or (3) Is not properly substantiated
or the taxpayer failed to keep adequate books and records with respect to
the item or position. See Treas. Reg. § 1.6694-2(c) regarding limitations
on the effectiveness of a disclosure regarding the section 6694 return preparer
penalty.
.02 Items.
(1) Form 1040, Schedule A, Itemized Deductions:
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying
all required information.
(b) Taxes: Complete lines 5 through 9, supplying all required information.
Line 8 must list each type of tax and the amount paid.
(c) Interest Expenses: Complete lines 10 through 14, supplying all
required information. This section 4.02(1)(c) does not apply to (i) amounts
disallowed under section 163(d) unless Form 4952, Investment Interest
Expense Deduction, is completed, or (ii) amounts disallowed under
section 265.
(d) Contributions: Complete lines 15 through 18, supplying all required
information. Enter the amount of the contribution reduced by the value of
any substantial benefit (goods or services) provided by the donee organization
in consideration, in whole or in part. Entering the value of the contribution
unreduced by the value of the benefit received will not constitute adequate
disclosure. If a contribution of $250 or more is made, this section will
not apply unless a contemporaneous written acknowledgment, as required by
section 170(f)(8), is obtained from the donee organization. If a contribution
of property other than cash is made and the amount claimed as a deduction
exceeds $500, attach a properly completed Form 8283, Noncash Charitable
Contributions, to the return. In addition to the Form 8283, if
a contribution of a qualified motor vehicle, boat, or airplane has a value
of more than $500, this section will not apply unless a contemporaneous written
acknowledgment, as required by section 170(f)(12), is obtained from the donee
organization and attached to the return. An acknowledgment under section
170(f)(8) is not required if an acknowledgment under section 170(f)(12) is
required.
(e) Casualty and Theft Losses: Complete Form 4684, Casualties
and Thefts, and attach to the return. Each item or article for
which a casualty or theft loss is claimed must be listed on Form 4684.
(2) Certain Trade or Business Expenses (including, for purposes of this
section, the following six expenses as they relate to the rental of property):
(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e)
must be followed.
(b) Legal Expenses: The amount claimed must be stated. This section
does not apply, however, to amounts properly characterized as capital expenditures,
personal expenses, or non-deductible lobbying or political expenditures, including
amounts that are required to be (or that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The amount written off must be stated.
(d) Reasonableness of Officers’ Compensation: Form 1120, Schedule
E, Compensation of Officers, must be completed when required
by its instructions. The time devoted to business must be expressed as a
percentage as opposed to “part” or “as needed.” This
section does not apply to “golden parachute” payments, as defined
under section 280G. This section will not apply to the extent that remuneration
paid or incurred exceeds the $1 million-employee-remuneration limitation,
if applicable.
(e) Repair Expenses: The amount claimed must be stated. This section
does not apply, however, to any repair expenses properly characterized as
capital expenditures or personal expenses.
(f) Taxes (other than foreign taxes): The amount claimed must be stated.
(3) Differences in book and income tax reporting.
(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss)
Reconciliation for Certain Partnerships: Column (b), Temporary
Difference, and Column (c), Permanent Difference,
of Part II, (reconciliation of income (loss) items) and Part III (reconciliation
of expense/deduction items).
(b) Form 1120. (i) Schedule M-1, Reconciliation of Income
(Loss) per Books With Income per Return.
(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation
for Corporations With Total Assets of $10 Million or More: Column
(b), Temporary Difference, and Column (c), Permanent
Difference, of Part II, (reconciliation of income (loss) items)
and Part III (reconciliation of expense/deduction items).
(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss)
Reconciliation for U.S. Life Insurance Companies With Total Assets of $10
Million or More: Column (b), Temporary Difference,
and Column (c), Permanent Difference, of Part II, (reconciliation
of income (loss) items) and Part III (reconciliation of expense/deduction
items).
(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income
(Loss) Reconciliation for U.S. Property and Casualty Insurance Companies With
Total Assets of $10 Million or More: Column (b), Temporary
Difference, and Column (c), Permanent Difference,
of Part II, (reconciliation of income (loss) items) and Part III (reconciliation
of expense/deduction items).
(e) Form 1120-S. Schedule M-3 (Form 1120S), Net Income (Loss)
Reconciliation for S Corporations With Total Assets of $10 Million or More:
Column (b), Temporary Difference, and Column (c), Permanent
Difference, of Part II, (reconciliation of income (loss) items)
and Part III (reconciliation of expense/deduction items).
For Schedule M-1 and all Schedules M-3, the information provided reasonably
must be expected to apprise the Service of the nature of the potential controversy
concerning the tax treatment of the item. If the information provided does
not so apprise the Service, a Form 8275 or Form 8275-R, must be used to adequately
disclose the item (see Part II of the instructions for those forms).
Note: An item reported on a line with a pre-printed description, shown
on an attached schedule, or “itemized” on Schedule M-1 may represent
the aggregate amount of several transactions producing that item (i.e.,
a group of similar items, such as amounts paid or incurred for supplies by
a taxpayer engaged in business). In some instances, the potentially controversial
item may involve a portion of the amount disclosed on the schedule. The Service
will not be reasonably apprised of the potential controversy by the amount
disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R
regarding that portion of the item.
The combining of unlike items, whether on Schedule M-1 or Schedule M-3
(or on an attachment when directed by the instructions), will not constitute
an adequate disclosure.
(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form
5713, International Boycott Report. Schedule A, International
Boycott Factor (Section 999(c)(1)); Schedule B, Specifically
Attributable Taxes and Income (Section 999(c)(2)); and Schedule
C, Tax Effect of the International Boycott Provisions,
must be completed when required by their instructions.
(b) Treaty-Based Return Position: Transactions and amounts under section
6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based
Return Position Disclosure Under Section 6114 or 7701(b).
(5) Other:
(a) Moving Expenses: Complete Form 3903, Moving Expenses,
and attach to the return.
(b) Employee Business Expenses: Complete Form 2106, Employee
Business Expenses, or Form 2106-EZ, Unreimbursed Employee
Business Expenses, and attach to the return. This section does
not apply to club dues, or to travel expenses for any non-employee accompanying
the taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136, Credit for Federal
Tax Paid on Fuels, and attach to the return.
(d) Investment Credit: Complete Form 3468, Investment Credit,
and attach to the return.
