IRS Updates Procedures For Making Adequate Tax Return Disclosures

The IRS updated its annual guidance on what is a sufficient disclosure made by a taxpayer for the purpose of reducing or avoiding substantial understatement or return preparer penalties.

Under Section 6662, the IRS can impose an addition to tax of 20% for the portion of an underpayment of tax required to be shown on a taxpayer's return. This penalty may apply in various situations, including when negligence is involved and when the understatement is shown to be substantial. The understatement is considered substantial for individuals when it exceeds the greater of 10% of the amount of tax required to be shown or $5,000. For C corporations, the understatement is substantial if the understatement exceeds the lesser of 10% of the amount of tax required to be shown on the return (or, if greater, $10,000), or $10 million.