03.02 Substantiation and Disclosure Flashcards
Define a reasonable tax position.
A reasonable position taken on a tax return is rooted in fact; supported by the law, rules, and other legal and administrative authorities; and satisfies the applicable standards of care.
What are the circumstances that a tax position is not deemed unreasonable?
There is substantial authority for the position, or the position was disclosed and there is reasonable basis for the position.
What does the “more likely than not” likelihood that the position will be upheld on its merits if it’s challenged mean?
> 50%; Standard satisfied if it is reasonable to conclude in good faith that there is a greater than 50% likelihood of success if challenged.
For a tax shelter, automatically unreasonable unless there is more than a 50% chance that the IRS would accept the position.
What does the “substantial authority” likelihood that the position will be upheld on its merits if it’s challenged mean?
~ 40%; Objective standard is satisfied if the weight of the authorities supporting the position is substantial in relation to weight of authorities supporting a contrary treatment.
Substantial authority is the threshold that Congress and the IRS has deemed reasonable.
What does the “realistic possibility” likelihood that the position will be upheld on its merits if it’s challenged mean?
~ 33%; Generally satisfied if there is approximately a one-in-three likelihood of success if challenged.
What does the “reasonable basis” likelihood that the position will be upheld on its merits if it’s challenged mean?
~ 20%; Satisfied if position is reasonably based on one or more authorities, taking into account the relevance and persuasiveness of those authorities. Reasonable basis is significantly higher than not frivolous or not patently improper.
True or False: A tax position does not need to be disclosed if the position is considered to have substantial authority.
True.
How can you avoid certain penalties when a tax position falls short of having substantial authority but the position is reasonably based?
By making adequate disclosure.
What is Form 8275?
Disclosure Statement. Generally used to disclose positions that lack substantial authority.
What is Form 8275-R?
Regulation Disclosure Statement. Used to disclose a tax position that is contrary to Treasury Regulations.
What are the circumstances where filing either Form 8275 or 8275-R won’t have an effect on Section 6662 accuracy-related penalties?
Filing either form will have no effect on accuracy-related penalties if:
1. the position does not have a reasonable basis
2. it is attributable to a tax shelter
3. it is not properly substantiated or the taxpayer failed to keep adequate books and records
Define substantiation?
Substantiation is being able to provide the IRS with documentary proof of taxable income, deductions and credits, and tax positions taken on a return.
What are examples of items that are often scrutinized and require additional evidence?
Home office deductions; vehicle mileage / business use; gifts to clients; travel and meals; charitable contributions.
What records should be retained and for how long?
All tax returns for the previous seven years.
All records that pertain to a return for the previous three years.
Other records, no matter how old, that would be needed to support a tax position on a subsequent return.
When must a taxpayer complete and file a Report on Foreign Bank and Financial Accounts?
If the aggregate value of all foreign financial accounts exceeds $10,000.
