Disclosure Statement (Form 8275), and Regulation Disclosure Statement (Form 8275-R)

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Instructions for Form 8275

9:18 - 10-FEB-2006

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Instructions for Form 8275

Department of the Treasury
Internal Revenue Service

(Rev. February 2006)
(Use with the May 2001 revision of Form 8275.)
Disclosure Statement

General Instructions
Section references are to the Internal
Revenue Code unless otherwise noted.

Purpose of Form
Form 8275 is used by taxpayers and income
tax return preparers to disclose items or
positions, except those taken contrary to a
regulation, that are not otherwise adequately
disclosed on a tax return to avoid certain
penalties. The form is filed to avoid the
portions of the accuracy-related penalty due
to disregard of rules or to a substantial
understatement of income tax for non-tax
shelter items if the return position has a
reasonable basis. It can also be used for
disclosures relating to preparer penalties for
understatements due to unrealistic positions
or disregard of rules.
The portion of the accuracy-related
penalty attributable to the following
CAUTION types of misconduct cannot be
avoided by disclosure on Form 8275.

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• Negligence.
• Disregard of regulations.
• Substantial understatement of tax on a
tax shelter item.
• Substantial valuation misstatement under
chapter 1.
• Substantial overstatement of pension
liabilities.
• Substantial estate or gift tax valuation
understatements.

Who Should File
Form 8275 is filed by individuals,
corporations, pass-through entities, and
income tax return preparers. If you are
disclosing a position taken contrary to a
regulation, use Form 8275-R, Regulation
Disclosure Statement, instead of Form
8275.
For items attributable to a pass-through
entity, disclosure should be made on the tax
return of the entity. If the entity does not
make the disclosure, the partner (or
shareholder, etc.) may make adequate
disclosure of these items.
Exception to filing Form 8275. Guidance
is published annually in a revenue
procedure in the Internal Revenue Bulletin.
This can be found on the Internet at
www.irs.gov. The revenue procedure
identifies circumstances when an item
reported on a return is considered adequate
disclosure for purposes of the substantial
understatement aspect of the
accuracy-related penalty and for avoiding
the preparer’s penalty relating to

understatements due to unrealistic
positions. See the Example below. You do
not have to file Form 8275 for items that
meet the requirements listed in this revenue
procedure.
Example. Generally, you will have met
the requirements for adequate disclosure of
a charitable contribution deduction if you
complete the contributions section of
Schedule A (Form 1040) and supply all the
required information. If you make a
contribution of property other than cash that
is over $500, the form required by the
Schedule A instructions must be attached to
your return.

How To File
File Form 8275 with your original tax return.
Keep a copy for your records. You may be
able to file Form 8275 with an amended
return. See Regulations sections 1.6662-4(f)
and 1.6664-2(c)(3) for more information.
To make adequate disclosure for items
reported by a pass-through entity, you must
complete and file a separate Form 8275 for
items reported by each entity.
Carrybacks, carryovers, and recurring
items. Carryover items must be disclosed
for the tax year in which they originated. You
do not have to file another Form 8275 for
those items for the tax years in which the
carryover is taken into account.
Carryback items must be disclosed for
the tax year in which they originated. You do
not have to file another Form 8275 for those
items for the tax years in which the
carryback is taken into account.
However, if you disclose items of a
recurring nature (such as depreciation
expense), you must file Form 8275 for each
tax year in which the item occurs.
If you are disclosing a position that is
contrary to a rule, and the position relates to
a reportable transaction as defined in
Regulations section 1.6011-4(b), you must
also make the disclosure required by
Regulations section 1.6011-4(b). See Form
8886, Reportable Transaction Disclosure
Statement, its instructions, and Rev. Proc.
2004-45, which is on page 140 of Internal
Revenue Bulletin 2004-31 at http://
www.irs.gov/pub/irs-irbs/irb04-31.pdf.

Accuracy-Related Penalty
Generally, the accuracy-related penalty is
20% of any portion of a tax underpayment
attributable to:
1. Negligence or disregard of rules or
regulations,
Cat. No. 62063F

2. Substantial understatement of income
tax,
3. Any substantial valuation
misstatement under chapter 1 of the Internal
Revenue Code,
4. Any substantial overstatement of
pension liabilities, or
5. Any substantial estate or gift tax
valuation understatement.
However, the penalty is 40% of any
portion of a tax underpayment attributable to
one or more gross valuation misstatements
in (3), (4), or (5) above if the applicable
dollar limitation under section 6662(h)(2) is
met.
Reasonable basis. Generally, you can
avoid the disregard of rules and substantial
understatement portions of the
accuracy-related penalty if the position is
adequately disclosed and the position has at
least a reasonable basis. Reasonable basis
is a relatively high standard of tax reporting
that is significantly higher than not frivolous
or not patently improper. The reasonable
basis standard is not satisfied by a return
position that is merely arguable.
The penalty will not be imposed on any
part of an underpayment if there was
reasonable cause for your position and you
acted in good faith in taking that position.
If you failed to keep proper books and
records or failed to substantiate items
properly, you cannot avoid the penalty by
disclosure.

Substantial Understatement
An understatement is the excess of:
1. The amount of tax required to be
shown on the return for the tax year, over
2. The amount of tax shown on the
return for the tax year, reduced by any
rebates.
There is a substantial understatement of
income tax if the amount of the
understatement for any tax year exceeds
the greater of:
1. 10% of the tax required to be shown
on the return for the tax year, or
2. $5,000 ($10,000 for a corporation
other than an S corporation or a personal
holding company as defined in section 542).
For tax years beginning after October 22,
2004, an understatement of a corporation
(other than an S corporation or a personal
holding company) is substantial if it exceeds
the lesser of:
1. 10% of the tax required to be shown
on the return for the tax year (or, if greater,
$10,000), or

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Instructions for Form 8275

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2. $10,000,000.
For purposes of the substantial
understatement portion of the
accuracy-related penalty, the amount of the
understatement will be reduced by the part
that is attributable to the following items.
• An item (other than a tax shelter item) for
which there was substantial authority for the
treatment claimed at the time the return was
filed or on the last day of the tax year to
which the return relates.
• An item (other than a tax shelter item) that
is adequately disclosed on this form if there
is a reasonable basis for the tax treatment of
the item. (In no event will a corporation be
treated as having a reasonable basis for its
tax treatment of an item attributable to a
multi-party financing transaction entered into
after August 5, 1997, if the treatment does
not clearly reflect the income of the
corporation.)
• A tax shelter item (other than a corporate
tax shelter item) for tax years ending before
October 23, 2004, if (a) there was
substantial authority for the treatment at the
time the return was filed or on the last day of
the tax year to which the return relates, and
(b) you reasonably believed that the tax
treatment of the item was more likely than
not the proper tax treatment.
For corporate tax shelter transactions
(and for tax shelter items of other taxpayers
for tax years ending after October 22, 2004),
the only exception to the substantial
understatement portion of the
accuracy-related penalty is the reasonable
cause exception. For more details, see
section 1.6664-4(e).
Tax shelter items. A tax shelter, for
purposes of the substantial understatement
portion of the accuracy-related penalty, is a
partnership or other entity, plan, or
arrangement, with a significant purpose to
avoid or evade federal income tax. For
transactions on or before August 5, 1997, a
tax shelter is a partnership or other entity,
plan, or arrangement, whose principal
purpose is to avoid or evade federal income
tax.
A tax shelter item is any item of income,
gain, loss, deduction, or credit that is directly
or indirectly attributable to the principal or
significant purpose of the tax shelter to
avoid or evade federal income tax.

Income Tax Return Preparer
Penalties
A preparer who files an income tax return or
claim for refund is subject to a $250 penalty
for taking a position which understates any
part of the liability if:
• The position has no realistic possibility of
being sustained on its merits,
• The preparer knew or reasonably should
have known of the position, and
• The position is frivolous or not adequately
disclosed on the return or on the appropriate
disclosure statement.
The penalty will not apply if it can be
shown that there was reasonable cause for
the understatement and that the preparer
acted in good faith.

In cases where any part of the
understatement of the liability is due to a
willful attempt by the return preparer to
understate the liability, or if the
understatement is due to reckless or
intentional disregard of rules or regulations
by the preparer, the preparer is subject to a
$1,000 penalty.
A preparer is not considered to have
recklessly or intentionally disregarded a rule
if a position is adequately disclosed and is
not frivolous.
Note. For more information about the
accuracy-related penalty and preparer
penalties, and the means of avoiding these
penalties, see Regulations sections 1.6662,
1.6664, and 1.6694.

Disclosure will not be considered
adequate unless (1) and (2) above
CAUTION are provided using Form 8275. For
example, your disclosure will not be
considered adequate if you attach a copy of
an acquisition agreement to your tax return
to disclose the issues involved in
determining the basis of certain acquired
assets. If Form 8275 is not completed and
attached to the return, the disclosure will not
be considered valid even if the information
in (1) and (2) above is provided.

Specific Instructions

Line 4. Contact your pass-through entity if
you do not know where its return was filed.
However, for partners and S corporation
shareholders, information for line 4 can be
found on the Schedule K-1 that you received
from the partnership or S corporation.

Be sure to supply all the information for
Parts I, II and, if applicable, Part III. Your
disclosure will be considered adequate if
you file Form 8275 and supply the
information requested in detail.
Use Part IV on page 2 if you need more
space for Part I or II. Indicate the
corresponding part and line number from
page 1. You can use a continuation sheet(s)
if you need additional space. Be sure to put
your name and identifying number on each
sheet.

Part I
Column (a). If you are disclosing a position
contrary to a rule (such as a statutory
position or IRS revenue ruling), you must
identify the rule in column (a).
Column (b). Identify the item by name.
If any item you disclose is from a
pass-through entity, you must identify the
item as such. If you disclose items from
more than one pass-through entity, you
must complete a separate Form 8275 for
each entity. Also, see How To File on
page 1.
Column (c). Enter a complete description
of the item(s) you are disclosing.
Example. If entertainment expenses
were reported in column (b), then list in
column (c) “theater tickets, catering
expenses, and banquet hall rentals.”
If you claim the same tax treatment for a
group of similar items in the same tax year,
enter a description identifying the group of
items you are disclosing rather than a
separate description of each item within the
group.
Columns (d) through (f). Enter the location
of the item(s) by identifying the form number
or schedule and the line number in columns
(d) and (e) and the amount of the item(s) in
column (f).

Part II
Your disclosure must include:
1. A description of the relevant facts and
the nature of the controversy affecting the
tax treatment of the item, or

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2. A concise description of the legal
issues presented by these facts.

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Part III

Paperwork Reduction Act Notice. We ask
for the information on this form to carry out
the Internal Revenue laws of the United
States. You are required to give us the
information if you wish to use this form to
make adequate disclosure to avoid the
portion of the accuracy-related penalty due
to a substantial understatement of income
tax or disregard of rules, or to avoid certain
preparer penalties. We need it to ensure
that you are complying with these laws and
to allow us to figure and collect the right
amount of tax.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB control
number. Books or records relating to a form
or its instructions must be retained as long
as their contents may become material in
the administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required by
section 6103.
The time needed to complete and file this
form will vary depending on individual
circumstances. The estimated burden for
individual taxpayers filing this form is
approved under OMB control number
1545-0074 and is included in the estimates
shown in the instructions for their individual
income tax return. The estimated burden for
all other taxpayers who file this form is
shown below.

Recordkeeping . . . . . . . . 3 hr., 35 min.
Learning about the law
or the form . . . . . . . . .
1 hr.
Preparing and sending
the form to the IRS . . .

1 hr., 6 min.

If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler, we
would be happy to hear from you. See the
instructions for the tax return with which this
form is filed.