General Instructions

Purpose of Form

Form 8275-R is used by taxpayers and tax return 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 economic substance penalty and the preparer penalties for 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.

  • Any substantial understatement of income tax on a tax shelter item.

  • Any substantial valuation misstatement under chapter 1.

  • Any substantial overstatement of pension liabilities.

  • Any substantial estate or gift tax valuation understatements.

  • Any claim of tax benefits from a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law.

  • Any otherwise undisclosed foreign financial asset understatement.

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 can 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 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.) can 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)(1) 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.

To make adequate disclosure for a position or positions related to more than one foreign entity, you must complete and file a separate Form 8275-R for each foreign entity.

Carryovers, carrybacks, 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 as indicated in Regulations section 1.6011-4(d). See Form 8886, Reportable Transaction Disclosure Statement, its instructions, Notice 2006-6, 2006-5 I.R.B. 385, available at http://www.irs.gov/irb/2006-05_IRB/ar10.html, and Notice 2010-62, 2010-40 I.R.B. 411, available at www.irs.gov/irb/2010-40_IRB/ar09.html.

Accuracy-Related Penalty

Generally, the accuracy-related penalty is 20% of any portion of a tax underpayment attributable to:

  1. Negligence or disregard of rules or regulations,

  2. Any substantial understatement of income tax,

  3. Any substantial valuation misstatement under chapter 1 of the Internal Revenue Code,

  4. Any substantial overstatement of pension liabilities,

  5. Any substantial estate or gift tax valuation understatement, or

  6. Any claim of tax benefits from a transaction lacking economic substance, as defined by section 7701(o), or failing to meet the requirements of any similar rule of law.

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. The penalty also increases to 40% for failing to adequately disclose a transaction that lacks economic substance in (6) above. See Economic substance, below. The penalty is 40% of any portion of an underpayment that is attributable to any undisclosed foreign financial asset understatement.

Economic substance.   To satisfy the disclosure requirements under section 6662(i), you may adequately disclose with a timely filed original return (determined with regard to extensions) or a qualified amended return (as defined under Regulations section 1.6664-2(c)(3)) the relevant facts affecting the tax treatment of the transaction.

  

Note.

If you filed a Schedule UTP, you may not need to file Form 8275-R to satisfy the disclosure requirements of section 6662(i). See the Instructions for Schedule UTP.

Reasonable cause exception.   Generally, no accuracy-related penalty will be imposed on any portion of an underpayment if you show that there was reasonable cause for that portion and that you acted in good faith with respect to that portion.

  
The reasonable cause and good faith exception does not apply to any portion of an underpayment attributable to a transaction that lacks economic substance under section 7701(o).

  If you failed to keep proper books and records or failed to substantiate items properly, you cannot avoid the penalty by disclosure.

Adequate disclosure.   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.

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.

If the return position is reasonably based on one of the authorities set forth in Regulations section 1.6662–4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard even though it may not satisfy the substantial authority standard as defined in Regulations section 1.6662–4(d)(2). For details, see Regulations section 1.6662–4(d).

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:

  1. The amount of tax required to be shown on the return for the tax year, over

  2. 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:

  1. 10% of the tax required to be shown on the return for the tax year, or

  2. $5,000.

An understatement of a corporation (other than an S corporation or a personal holding company, as defined in section 542) is substantial if it exceeds in any year the lesser of:

  1. 10% of the tax required to be shown on the return for the tax year (or, if greater, $10,000), or

  2. $10,000,000.

Reduction of understatement.   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.

  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 Reasonable cause exception (earlier),section 6662(d) and Regulations section 1.6664-4.

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.

Tax Return Preparer Penalties

A preparer who files a return or claim for refund is subject to a penalty in an amount equal to the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer, with respect to the return or claim, for taking a position which the preparer knew or reasonably should have known would understate any part of the liability if:

  • There is or was no substantial authority for the position.

  • The position is a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies and it was not reasonable to believe that the position would more likely than not be sustained on its merits.

  • The position disclosed as provided in section 6662(d)(2)(B)(ii), is not a tax shelter or a reportable transaction to which section 6662A applies, and there was no reasonable basis for the position.

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 penalty equal to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim. This penalty shall be reduced by the amount of the penalty paid by such person for taking an unreasonable position, or a position with no reasonable basis, as described immediately above.

A preparer is not considered to have recklessly or intentionally disregarded a rule if a position is adequately disclosed and has a reasonable basis.

Note.

For more information about the accuracy-related penalty and preparer penalties, and the means of avoiding these penalties, see the regulations under sections 6662, 6664, and 6694.


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