Thanks to the Tax Cuts and Jobs Act (TCJA) tax reform, you have thousands of pages of new tax rules and not a lot of guidance on many of them.
Let’s say you want to take a certain tax-deduction position on your tax return, but you think it could go either way based on how someone reads the law.
Penalties! The tax code has special penalties that apply to both you and your tax advisor for what the law calls a substantial understatement of tax liability.
For you. You face a 20 percent accuracy-related penalty when your tax liability is understated by the greater of
For me. If your tax preparer understates your tax liability because of an unreasonable position as defined by tax law, your preparer faces penalties equal to the greater of
We have two options:
Disclosure is the proactive strategy designed to prevent you from incurring the penalties above if the IRS later disallows your tax deduction.
To avoid the trouble, we must ensure that your tax return adequately discloses the position. In general, this requires that the return have a properly completed Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement).
The position we take for you must have a reasonable basis in the law. Reasonable basis is more than being “not frivolous,” “not improper,” or “merely arguable”; it has to be reasonably rooted in at least one relevant tax authority.