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IRS updates annual revenue procedure on adequate disclosure for reducing accuracy-related penalty and for avoiding preparer penalty

January 18, 2012 | No. 2012-28


The IRS today released an advance copy of Rev. Proc. 2012-15, which updates the annual revenue procedure concerning circumstances when disclosure on a taxpayer's return with respect to an item or a position is adequate for purposes of:

  • Reducing the understatement of income tax under section 6662(d) (relating to the substantial understatement aspect of the accuracy-related penalty)
  • Avoiding the preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns

For an electronic version of today’s revenue procedure (14 pages): Rev. Proc. 2012-15

Changes contained in Rev. Proc. 2012-15

Rev. Proc. 2012-15 updates the most recent annual guidance (Rev. Proc. 2011-13) to:

  • Correct a reference to Schedule M-3 (Form 1120), Part III (reconciliation of expense/deduction items)
  • Include a reference to the employee-remuneration limitations under amended section 162(m).

As with the previous revenue procedure, Rev. Proc. 2012-15 does not apply with respect to any other penalty provisions—including the disregard provisions of the section 6662 accuracy-related penalty, or the increased accuracy-related penalties that apply for nondisclosed noneconomic substantial transactions or for undisclosed foreign financial asset understatements.

Effective provisions

Rev. Proc. 2012-15 applies to any income tax return on 2011 tax forms for a tax year beginning in 2011, and to any income tax return filed on 2011 tax forms in 2012 for a short tax year beginning in 2012.

Background

In general, the regulations pertaining to the substantial understatement penalty provide that the substantial understatement penalty may be avoided by adequate disclosure of a return position as long as the position had at least a reasonable basis.

Under the regulations, disclosure is adequate if it is made on a properly completed and filed Form 8275, Disclosure Statement, or in the case of a position contrary to a regulation, on Form 8275-R, Regulation Disclosure Statement.

Disclosure is also adequate if it is made in accordance with the annual revenue procedure issued by the IRS with respect to return disclosures.

Disclosure of a position does not avoid the substantial understatement penalty if the position or item is attributable to a tax shelter—i.e., a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax.

In late December 2010, Rev. Proc. 2011-13 was issued as an annual update of disclosure provisions as previously provided in Rev. Proc. 2010-15 and Rev. Proc. 2008-14, concerning circumstances when disclosure on a taxpayer's return with respect to an item or a position was adequate.

Rev. Proc. 2011-13 applied to any income tax return filed on 2010 tax forms for a tax year beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short tax years beginning in 2011.

KPMG observation

Taxpayers relying on the annual revenue procedure for disclosure must be certain that they are relying on and considering the appropriate revenue procedure for the return and tax year at issue (i.e., the revenue procedure that applies for the return being filed) and that they have furnished all required information in accordance with that revenue procedure.

 

Rev. Proc. 2012-15 will appear in Internal Revenue Bulletin 2012-7, dated February 13, 2012.

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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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