Representation before the IRS · Related Issues

Tax return disclosure statements

There are two disclosure forms and they are mirror images. Form 8275 discloses a position that is not contrary to a regulation; Form 8275-R discloses one that is. Each avoids a portion of the accuracy-related penalty the other cannot, and filing the wrong one leaves the exposure exactly where it was. Beyond that, both share a limit that matters more than the choice between them: disclosure buys nothing unless the position already has a reasonable basis.

The rule

Form 8275. See the figures table (Instructions for Form 8275). It is filed by “individuals, corporations, pass-through entities, and tax return preparers.”

Form 8275-R. See the figures table (Instructions for Form 8275-R). “If you are disclosing a position taken contrary to a regulation, use Form 8275-R … instead of Form 8275.”

The mirror. Read the two exclusion lists side by side and the distinction is exact. Form 8275 cannot avoid the portion attributable to disregard of regulations. Form 8275-R cannot avoid the portion attributable to disregard of rules (other than regulations). Everything else on the two lists is identical — see the figures table for the items neither form can cure.

The condition on disclosure. See the figures table. Two points sit inside it. To avoid the disregard-of-regulations portion the position must also “represent a good-faith challenge to the validity of the regulation” (Reg. § 1.6662-3(c)(1)) — disclosure alone is not enough. And “if you failed to keep proper books and records or failed to properly substantiate the items, you cannot avoid the penalty by disclosure.”

Reasonable basis. See the figures table. Note the ordering the instructions set out: reasonable basis is below substantial authority but well above “not frivolous.”

Substantial understatement. An understatement is the excess of the tax required to be shown over the tax shown, reduced by rebates; it is substantial at the thresholds in the figures table. The understatement is reduced by items for which there was substantial authority (other than tax shelter items), and by items adequately disclosed on the form where there is a reasonable basis (again other than tax shelter items).

Tax shelter items are outside all of it. “For corporate tax shelter transactions (and for tax shelter items of other taxpayers for tax years ending after 22 October 2004), the only exception to the substantial understatement portion of the accuracy-related penalty is the reasonable cause exception.” A tax shelter here is a partnership, entity, plan or arrangement “with a significant purpose to avoid or evade federal income tax.”

When you need not file at all. “Guidance is published annually in a revenue procedure … that identifies circumstances when an item reported on a return is considered adequate disclosure” for the substantial understatement portion and for avoiding the preparer penalty for unreasonable positions. “You don’t have to file Form 8275 for items that meet the requirements listed in this revenue procedure.” The instructions give the example of a charitable contribution deduction fully completed on Schedule A with all required forms attached.

How and when to file. With the original return; a copy is kept. Filing with an amended return may be possible — see Reg. §§ 1.6662-4(f)(1) and 1.6664-2(c)(3). A separate form is completed for each pass-through entity and for each foreign entity. Carryover and carryback items are disclosed for the year in which they originated, and need not be disclosed again in the years the carryover or carryback is taken into account.

Preparer penalties. Disclosure matters to the preparer too. The § 6694(a) penalty applies where a disclosed position “isn’t a tax shelter or a reportable transaction … and there was no reasonable basis for the position,” and “a preparer isn’t considered to have recklessly or intentionally disregarded a rule if a position is adequately disclosed and has a reasonable basis.”

Current figures

How it works in practice

Get the form right or get nothing. The two exclusion lists are identical except for one line each, and that line is the whole point. A position contrary to a Treasury regulation disclosed on Form 8275 does not avoid the disregard-of-regulations penalty, because Form 8275 expressly excludes it. The reverse is equally true. Ask one question first: is this position contrary to a regulation? The answer picks the form.

Disclosure is not a substitute for a position. Reasonable basis is described by the IRS as “a relatively high standard … significantly higher than not frivolous or not patently improper,” and “isn’t satisfied by a return position that is merely arguable.” A weak position does not become safe because it is disclosed. Disclosure protects a defensible position from a procedural penalty; it does nothing for an indefensible one.

Contrary-to-regulation positions need two things, not one. Filing Form 8275-R gets the disclosure. Avoiding the disregard-of-regulations penalty also requires that the position “represent a good-faith challenge to the validity of the regulation.” A taxpayer who simply prefers a different answer than the regulation gives has not made a good-faith challenge to its validity, and the form will not help.

Disclosure cannot cure a substantiation failure. The instructions say so directly. Where the real problem is missing records — travel, gifts, listed property, or anything else — a disclosure statement is the wrong tool, and filing one signals the weakness without curing it.

Tax shelter items are outside the whole scheme. For tax shelter items the only route out of the substantial understatement penalty is reasonable cause. Disclosure does not reduce the understatement, substantial authority does not reduce it, and reasonable basis is irrelevant. Where a significant purpose of an arrangement is federal income tax avoidance, stop thinking about Form 8275.

Check the annual revenue procedure before filing anything. An item that meets the requirements of the annual adequate-disclosure revenue procedure needs no Form 8275 at all. The instructions’ own example — a charitable contribution deduction with the Schedule A section completed and all required forms attached — shows how ordinary the covered items are. Filing an unnecessary Form 8275 is not harmful, but it draws attention that the return did not need.

Disclose in the year the item originates, once. Carryovers and carrybacks are disclosed for the originating year and not again. A practitioner filing a fresh Form 8275 each year a net operating loss is absorbed is doing unnecessary work.

The preparer’s protection runs on the same track. A preparer is not treated as having recklessly or intentionally disregarded a rule where the position is adequately disclosed and has a reasonable basis. Both limbs are required, and the second is the one that fails.

How this has changed

The exclusion lists have grown, and recent additions are easy to miss. Both forms now list, among the items disclosure cannot cure, undisclosed foreign financial asset understatements, inconsistent estate basis, overstatement of the § 170(p) deduction, and disallowance under § 170(h)(7) — the last two reflecting recent conservation-easement legislation. Older summaries listing only negligence, valuation misstatements, pension liabilities and estate or gift valuation are incomplete.

Economic substance is a hard carve-out, and the reasonable cause exception does not reach it. The instructions state that the reasonable cause and good faith exception “doesn’t apply to any portion of an underpayment attributable to a transaction that lacks economic substance under section 7701(o).” That makes the § 6662(i) penalty effectively strict, and it is a different animal from the rest of the accuracy-related penalty.

Schedule UTP can substitute for Form 8275 on economic substance. Where Schedule UTP (Form 1120) has been filed, the instructions note that a Form 8275 may not be needed to satisfy the § 6662(i) disclosure requirement. That interaction is easy to miss on a corporate return.

Tax shelter items lost the disclosure route in stages. The exclusion applied to corporate tax shelter transactions first, and was extended to tax shelter items of other taxpayers for tax years ending after 22 October 2004. Material describing the disclosure route as available to an individual’s tax shelter item is describing the pre-2004 position. The definition also shifted from principal purpose to significant purpose for transactions after 5 August 1997.

Read the revision dates. The instructions relied on here are Rev. 10/2024 for Form 8275 and Rev. 11/2024 for Form 8275-R. The annual adequate-disclosure revenue procedure changes every year and is the item on this page most likely to be stale — check the current one before relying on the no-filing exception.

Exam focus

Know the mirror: Form 8275 for positions not contrary to a regulation, Form 8275-R for positions contrary to one — and that each cannot cure the disregard portion the other addresses.

Know that disclosure works only where the position has a reasonable basis, and that reasonable basis is below substantial authority but well above not frivolous.

Know that avoiding the disregard-of-regulations portion additionally requires a good-faith challenge to the validity of the regulation.

Know that disclosure cannot cure negligence, a substantiation failure, valuation misstatements, or a tax shelter item — for which the only exception is reasonable cause.

Know that the annual revenue procedure identifies items treated as adequately disclosed without any Form 8275.

Know that a preparer avoids the reckless-or-intentional-disregard penalty only where the position is both adequately disclosed and has a reasonable basis.

Check yourself

1. Form 8275 may be used to avoid the portion of the accuracy-related penalty attributable to which of the following? (A) A substantial understatement for a non-tax-shelter item where the position has a reasonable basis (B) Negligence (C) Disregard of regulations (D) A substantial understatement on a tax shelter item Answer: A. Disregard of regulations is Form 8275-R’s territory; negligence and tax shelter understatements cannot be cured by disclosure on either form.

2. A taxpayer takes a position contrary to a Treasury regulation. What is required to avoid the disregard-of-regulations penalty? (A) Filing Form 8275 (B) Filing Form 8275-R only (C) Filing Form 8275-R and a position representing a good-faith challenge to the validity of the regulation (D) Substantial authority alone Answer: C. Reg. § 1.6662-3(c)(1) adds the good-faith-challenge requirement on top of disclosure.

3. Which best describes the reasonable basis standard? (A) Any position that is not frivolous (B) A relatively high standard, significantly higher than not frivolous, not met by a merely arguable position (C) The same as substantial authority (D) More likely than not Answer: B. It sits below substantial authority and well above not frivolous.

4. A taxpayer’s records are incomplete and the items are unsubstantiated. Does a Form 8275 disclosure avoid the accuracy-related penalty? (A) Yes, if the disclosure is detailed (B) Yes, for the disclosed items only (C) No — disclosure cannot cure a failure to keep proper books and records or to substantiate (D) Yes, if filed with the original return Answer: C. The instructions say so directly.

5. For a tax shelter item in a tax year ending after 22 October 2004, what is the only exception to the substantial understatement portion of the penalty? (A) Adequate disclosure with a reasonable basis (B) Substantial authority (C) Reasonable cause (D) Filing Form 8275-R Answer: C. Disclosure and substantial authority both drop out for tax shelter items.