The IRS has published Revenue Procedure 2024-44[^1], an update on adequate disclosure on tax returns that are filed for purposes of reducing penalties that may be imposed on a taxpayer under IRC §6662(d) or on a tax preparer under IRC §6694. The IRS normally releases these updates annually.

Use of Forms 8275 and 8275-R

Revenue Procedure 2024-44 discusses the appropriate use of Forms 8275 and 8275-R in several contexts. These forms are used for disclosing specific information to avoid certain penalties. Here’s a breakdown of when these forms are required or relevant, according to the sources:

• General Use: If a specific item or position is not covered by the revenue procedure, disclosure is adequate only if made on a properly completed Form 8275 or 8275-R, as appropriate. The forms must be attached to the return for the year or to a qualified amended return.
• Related Party Transactions: If an understatement arises from a transaction between related parties, that transaction and the relationship must be disclosed on Form 8275 or 8275-R.
• Schedule M-1 and M-3 Disclosures: If the information provided on Schedule M-1 or any Schedule M-3 does not reasonably apprise the IRS of a potential controversy regarding a tax item, Form 8275 or 8275-R must be used to adequately disclose the item. This is especially true when an aggregate amount disclosed on these schedules involves a potentially controversial item that is only a portion of the aggregate amount.
• Tax Law Changes: If a line referenced in the revenue procedure is affected by tax law changes effective for tax years beginning after December 31, 2024, and requires additional reporting, a taxpayer may need to file Form 8275 or Form 8275-R until the IRS provides other guidance.
• Schedule UTP: A complete and accurate disclosure on Schedule UTP, Uncertain Tax Position Statement, is treated as if the corporation filed a Form 8275 or Form 8275-R regarding the tax position. However, the reverse is not true: filing a Form 8275 or Form 8275-R does not mean a Schedule UTP was filed.

Adequate Disclosure on a Tax Return Aside from Forms 8275 and 8275-R

Adequate disclosure on a tax return is important for taxpayers to reduce potential penalties related to underpayment of taxes. Revenue Procedure 2024-44 outlines specific requirements for what constitutes adequate disclosure for the purposes of avoiding penalties under section 6662(d) of the Internal Revenue Code, which relates to the accuracy-related penalty for substantial understatement of income tax, and for avoiding the tax return preparer penalty under section 6694(a) for understatements due to unreasonable positions.

General Requirements for Adequate Disclosure

• Forms and Instructions: Taxpayers must complete all forms and attachments clearly and according to their instructions.
• Verifiable Amounts: All money amounts entered on the forms must be verifiable. This means that, if audited, the taxpayer must be able to prove the origin of the amount and demonstrate good faith in entering that number on the applicable form.
• Clear Identification: If an amount is shown on a line that does not have a pre-printed description, the taxpayer must clearly identify the item by including the description on that line. For example, a bad debt for a sole proprietorship should be identified as "bad debt" on the appropriate line.
• Descriptive Language: For items on Schedule M-3, descriptive language must be used. If space on the form is limited, the description must be provided on an attachment.
• Related Party Transactions: Disclosure is not considered adequate if the understatement arises from a transaction between related parties, unless the transaction and relationship are disclosed on Form 8275 or 8275-R.

Specific Items and Forms Requiring Disclosure

The revenue procedure outlines specific requirements for various items, and includes a list of forms that must be completed and attached when applicable:

• Schedule A (Form 1040), Itemized Deductions:
  • Medical and Dental Expenses: Complete lines 1 through 4.
  • Taxes: Complete lines 5 through 7, listing each type of tax and the amount paid.
  • Interest Expenses: Complete lines 8 through 10, with some exceptions.
  • Charitable Contributions: Complete lines 11 through 14, attaching all required forms.
  • Casualty and Theft Losses: Complete Form 4684, listing each item for which a loss is claimed.
• Certain Trade or Business Expenses:
  • Casualty and Theft Losses: Follow the procedure outlined for Schedule A.
  • Legal Expenses: State the amount claimed, excluding items such as capital expenditures.
  • Specific Bad Debt Charge-Off: State the amount written off.
  • Officers’ Compensation: Complete Form 1125-E when required, expressing time devoted to business as a numerical percentage.
  • Repair Expenses: State the amount claimed, excluding capital expenditures or personal expenses.
  • Taxes (other than foreign taxes): State the amount claimed.
• Differences in Book and Income Tax Reporting: For Schedule M-1 and all Schedules M-3, the information provided must reasonably apprise the IRS of the potential controversy. If not, Form 8275 or 8275-R must be used.
  • Combining unlike items on Schedule M-1 or M-3 is not adequate disclosure.
  • Schedules M-3 for various forms such as 1065, 1120, 1120-L, 1120-PC, 1120-S, and 1120-F, require specific information in Parts II and III, including income/loss and expense/deduction reconciliations. Taxpayers filing Schedule M-3 may also be required to complete Schedule B (Form 1120) or Schedule C (Form 1065).
• Foreign Tax Items:
  • International Boycott Transactions: Complete Form 5713, including Schedules A, B, and C.
  • Treaty-Based Return Position: Complete Form 8833.
• Other Items:
  • Moving Expenses: Complete Form 3903.
  • Employee Business Expenses: Complete Form 2106.
  • Fuels Credit: Complete Form 4136.
  • Investment Credit: Complete Form 3468.

Limitations on Adequate Disclosure

Even if the literal requirements of the revenue procedure are met, disclosure will not be adequate in certain circumstances:

• If the item or position does not have a reasonable basis.
• If the item is attributable to a tax shelter.
• If the item is not properly substantiated, or if the taxpayer failed to keep adequate books and records.
• For tax return preparers, disclosure has no effect on the section 6694(a) penalty if the position is related to a tax shelter or a reportable transaction.

In summary, adequate disclosure requires providing all necessary information on the correct forms, attaching required documentation, clearly describing items, and ensuring that amounts are verifiable. Certain items, particularly those involving related parties or complex transactions, may require additional disclosure on Form 8275 or 8275-R. The revenue procedure applies to any income tax return filed on 2024 tax forms for a taxable year beginning in 2024, and to any income tax return filed in 2025 on 2024 tax forms for short taxable years beginning in 2025.

[^1] Revenue Procedure 2024-44, December 23, 2024