On August 19, 2020 the IRS requested comments on whether it should eliminate disclosures made under Revenue Procedure 94-69, which allows taxpayers to avoid accuracy-related penalties with respect to self-reported adjustments at the beginning of an IRS audit.
More particularly, Revenue Procedure 94-69 allows certain taxpayers who have been notified of an examination by the IRS to avoid the accuracy-related penalties to the extent that adjustments resulting in additional tax are reported, or a position contrary to a rule is adequately disclosed, in a written statement within a 15-day window beginning with IRS exam’s first written information request. Rev. Proc. 94-69 requires the taxpayer to have a reasonable basis for the position being disclosed. A written statement made under the rules of Rev. Proc. 94-69 is treated as a qualified amended return (QAR) for purposes of the disclosure exception to the accuracy-related penalty. We have discussed using a QAR to avoid accuracy-related penalties in a previous blog post. Under Rev. Proc. 94-69, the description of the item in the statement is considered adequate if it contains information that reasonably may be expected to apprise the IRS of the identity of the item, its amount, and the nature of the controversy. If the taxpayer takes a position that is contrary to a rule or regulation, the statement must adequately identify the statutory or regulatory provision or the ruling in question. Although the language of Revenue Procedure 94-69 suggests that it only applies to taxpayer that are subject to the Coordinated Examination Program (“CEP”), it has been successfully used by taxpayers who were not in CEP.
Of course the elimination of Rev. Proc. 94-69 would not be the death knell to penalty mitigation. Even if the IRS revokes the taxpayers’ ability to make disclosures under Rev. Proc. 94-69, taxpayers will continue to have the opportunity to utilize existing methods for making adequate disclosures to avoid the imposition of penalties. Taxpayers can use Form 8275 and 8275-R to make a disclosure, discussed here, or a Schedule UTP if applicable. Also, a taxpayer can file a QAR at any time before the taxpayer is first contacted by the IRS regarding an examination of the return. There is even an argument that a taxpayer under an examination for one year can use the QAR process for subsequent years if the QAR is filed before the taxpayer is contacted in writing regarding the examination of that subsequent year return.
For questions related to this or any other civil tax or criminal tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or firstname.lastname@example.org.