Avoiding accuracy-related penalties under Rev. Proc. 94-69.

Regs. Sec. 1.6664-2(c)(3) provides that a qualified amended return is an amended return filed after the return due date (including extensions) and before the taxpayer is first contacted by the IRS concerning an examination of the return. This concept is significant, because (1) the Sec. 6662 accuracy-related penalty is imposed on tax underpayments attributable to negligence, intentional disregard of rules or regulations, substantial understatements, etc.; and (2) under Regs. Sec. 1.6664-2(c)(2), any additional tax reported on a qualified amended return generally is taken into account in determining whether and the extent to which an underpayment exists. A taxpayer can also file a qualified amended return solely for purposes of transmitting a Form 8275, Disclosure Statement, or 8275-R, Regulation Disclosure Statement.

Under Regs. Sec. 1.6664-2(c)(4), the rules on qualified amended returns may be modified by revenue procedure for "particular classes of taxpayers." Because, generally, all tax years of large corporate taxpayers that are part of the IRS Coordinated Industry Program (CIP) are examined in some respects, it is not appropriate to consider the first time that the IRS contacts these corporations concerning an examination as a criterion for determining whether an amended return is a qualified amended return. Accordingly, Rev. Proc. 94-69 provides special procedures for CIP taxpayers to show additional tax due or adequately disclose return items or positions, so as to avoid imposition of a Sec. 6662 accuracy-related penalty.

Rev. Proc. 94-69 Statements

A disclosure under Rev. Proc. 94-69 is a statement submitted to Examinations within 15 days of its written request to the taxpayer (or on or before any later date agreed to in writing by the parties). Most statements submitted under Rev. Proc. 94-69 are intended to alert the IRS to one or more problem items or positions taken on the return to be examined, with the taxpayer maintaining (at least at the outset of the examination) that its return treatment of the item is correct. As long as the statement satisfies Rev. Proc. 94-69's procedural requirements, it will be treated as a qualified amended return and generally will protect the taxpayer from the intentional disregard and substantial understatement components of the Sec. 6662 accuracy-related penalty, provided that there is at least a "reasonable basis" for the return position. (Use of a reasonable-basis threshold eliminated the disclosure exception for purposes of the negligence component of the Sec. 6662 penalty, because a position that has a reasonable basis per se is not negligent.)

Rev. Proc. 94-69 also provides that a taxpayer may submit a written statement to "report additional tax due." Because scant attention has been paid to this aspect of the revenue procedure by either taxpayers or the Service, numerous questions arise, including, most fundamentally, why a taxpayer might wish to submit such a statement.

Penalty Protection

The answer appears to be two-fold. First, because return positions "conceded" by a taxpayer on a Rev. Proc. 94-69 statement are not subject to the reasonable-basis threshold applicable to positions that are merely disclosed, penalty protection (including protection from the Sec. 6662 negligence component) may be obtained for a broader range of return positions.

Second, because the "disclosure plus reasonable basis" safe harbor does not apply to corporate tax shelter items, a Rev. Proc. 94-69 disclosure statement affords no protection from a Sec. 6662 accuracy-related penalty imposed as to such a return position. However, a written statement that reports additional tax due attributable to a corporate tax shelter item may constitute a qualified amended return under Regs. Sec. 1.6664-2(c)(3). If so, the additional tax would be added to the amount shown on the taxpayer's return for purposes of determining whether there is an underpayment of tax attributable to negligence, intentional disregard, a substantial understatement of income tax or a substantial valuation misstatement. This strategy also may apply when the taxpayer cannot avail itself of the normal adequate disclosure, realistic possibility or reasonable cause and good faith exceptions to the Sec. 6662 accuracy-related penalty, because the taxpayer failed to disclose a "reportable transaction" within the meaning of Sec. 6011 and Regs. Sec. 1.6011-4.

As specified, the statement should (1) be captioned "Furnished under Rev. Proc. 94-69," (2) be signed under penalties of perjury and (3) describe the return item or position in question in a manner that reasonably may be expected to apprise the Service of the item's identity, its amount and the nature of the controversy or potential controversy.

To avoid confusion, the written statement also should (1) clearly communicate that it is being submitted to "show additional tax due," rather than merely to disclose the return position or item in question and (2) identify the adjustments to the taxpayer's taxable income that would appear on a properly completed Form 1120X, Amended U.S. Corporation Income Tax Return, that included the item or position.

Finally, while the Service is entitled immediately to assess and collect amounts shown as due on an amended return, it is unclear whether it would assess the additional tax shown on this type of written statement. Before making an assessment, the Service could ask the taxpayer to sign Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, or to submit an actual Form 1120X. Alternatively, it might simply incorporate the taxpayer's concessions into the examination report. Regardless, the penalty protection that appears to be afforded by a Rev. Proc. 94-69 statement reporting additional tax should not be weakened.

FROM MICHAEL A. URBAN, J.D., MLT, AND DANIEL J. WILES, J.D., WASHINGTON, DC

Annette B. Smith, CPA 

Partner

Washington National Tax Service

PricewaterhouseCoopers LLP 

Washington, DC