Substantiation & Disclosure of Tax Positions

Question 1

The IRC imposes a 20% penalty on what types of underpayments (2)

Answer 1

Anything attributable to negligence or disregards of rules/regulations. Any substantial understatement of income tax. An understatement in this category is reduced by the amount attributable to any item where the relevant facts are properly disclosed and there is a “reasonable basis” ( >20%chance of being sustained) for the tax treatment

Question 2

If you’re going to take an aggressive tax position and there’s the chance that it will be challenged, what must you be certain of

Answer 2

As long as the “reasonable basis” which is >20% is reached and it is properly disclosed then you will not be subject to an understatement penalty