1998 guidelines for understatements.

The IRS issued its 1998 guidelines for underpayment of tax on income tax returns, including a list of adequate disclosures--that is, understated items on the return that do not require additional paperwork or attachments. Little has changed from the 1997 guidelines.

Preparers can be penalized up to 40% of the understated tax liability of an incorrect tax return--for example, one in which a taxpayer understates income or overstates deductions to reduce the amount of the tax liability. IRS revenue procedure 96-58 provides guidance in determining when certain disclosures on a tax return are adequate and therefore are not cause for the 40% penalty for underpayment. For example, 1998 adequate disclosure for an individual's Schedule A, Itemized Deductions, includes certain medical and dental expenses, taxes, interest expenses, contributions and casualty and theft losses. Revenue procedure 96-58 also lists adequate disclosures for certain trade or business expenses, foreign tax items and items on Form 1120 Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return.

"CPAs have to be very familiar with these guidelines to avoid stiff penalties," said Nancy H. Boozer, a member of the AICPA tax forms committee and a partner of Rogers & Laban in Columbia, South Carolina. "We have to be sure we have documentation for these items on our clients' returns, especially when the amounts are substantially different from the prior year."

Revenue procedure 96-58 applies to any return filed on 1997 tax forms for taxable years beginning in 1997 or for short taxable years beginning in 1998. For more information on the new guidelines, contact Marcia Rachy of the IRS at 202-622-6232.