CCA 200851062: Rev. Proc. 94-69 disclosure is not a penalty shield, but agreed adjustments leave nothing to penalize

Plain-English summary

Two messages in one release, the lower one written first. A colleague sets out what Revenue Procedure 94-69 does and does not do for penalty purposes and invites correction; the reply agrees and adds the point that matters most.

The lower message starts by killing the assumption behind the question. Simply disclosing transactions under Rev. Proc. 94-69 does not automatically get a taxpayer out of negligence or substantial understatement penalties. What the procedure does is narrower: it treats a particular kind of written statement, given at the beginning of an audit, as if it were a qualified amended return. So where the whole penalty question is one of adequate disclosure, a statement under Rev. Proc. 94-69 stands in the same place as a Form 8275 disclosure statement attached to the return. That is a meaningful benefit, but it is a benefit about disclosure only, and disclosure is only one of several ways a penalty is avoided.

Two limits follow, each with a regulation behind it. Even with adequate disclosure, a penalty can still be imposed, in the words of Treas. Reg. 1.6662-3(c)(1), in the case of a position that does not have a reasonable basis or where the taxpayer fails to keep adequate books and records or to substantiate items properly. And the adequate disclosure exception to the substantial understatement penalty does not apply to tax shelter items at all, under Treas. Reg. 1.6662-4(g)(1)(iii). A taxpayer who discloses a shelter position has disclosed it and gained nothing against that penalty.

The reply agrees with all of that as far as it goes and adds a different route to the same destination. If the taxpayer is actually agreeing to adjustments made in accordance with a document treated as a qualified amended return under the procedure, there could not be accuracy-related penalties based on the amount of those adjustments. This is the point the release is classified under, the definition of underpayment. The accuracy-related penalty is a percentage of an underpayment, and an underpayment is measured against the amount shown as tax on the return, with a qualified amended return taken into account in fixing that amount. Adjustments already captured by the amended figure therefore produce no underpayment, and a penalty computed on zero is zero. The first message answers whether disclosure excuses a penalty; the second observes there may be no penalty base to begin with.

Neither writer resolves the case. The reply closes "I hope that I said that clearly enough" and the message below it ends by asking a third person to flag anything they disagree with, so the release is a working exchange rather than a conclusion.

One discrepancy to note. The document header prints "Release Date: 7/21/2009", but its own "Number: 200851062" places it in the batch released 19 December 2008, which is also what the IRS index gives, and every neighbouring release checked here prints 12/19/2008. The number and the index agree with each other, so the frontmatter follows them and the header date appears to be a stamping error on the IRS side. It is reproduced unaltered in the full text below.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "RP 94-69" in the reply against "Rev. Proc. 94-69" below it; "all that's stated"; "as if a Form 8275 was attached to the tax return"; and the stray "1" above the header.

Ruling snapshot

• Question: Does disclosure under Rev. Proc. 94-69 protect a taxpayer from the negligence and substantial understatement penalties?
• Outcome: Advice given, in an unresolved exchange. Not automatically. The procedure treats a written statement given at the start of an audit as a qualified amended return, so it stands in for a Form 8275 where the issue is adequate disclosure, but a penalty may still be imposed for a position without a reasonable basis or a failure to keep adequate books and records or substantiate items, and the adequate disclosure exception does not reach tax shelter items. Separately, where the taxpayer agrees to adjustments made in accordance with a document treated as a qualified amended return, there could not be accuracy-related penalties based on the amount of those adjustments.
• Key authorities: IRC sections 6664 and 6662; Rev. Proc. 94-69; Treas. Reg. 1.6662-3(c)(1); Treas. Reg. 1.6662-4(g)(1)(iii); Form 8275.

Full text (IRS public release)

1

ID: CCA_2008100616421664 Number: 200851062
Office: ------------- Release Date: 7/21/2009

UILC: 6664.01-00

From: ------------------
Sent: Monday, October 06, 2008 4:42:19 PM
To: -------------------------------------------------
Cc:
Subject: RE: Penalty Question

I agree with all that's stated as far as it goes. In addition, if the taxpayer is actually agreeing to adjustments to be made in accordance with a document treated as a qualified amended return under procedures under RP 94-69, there could not be accuracy-related penalties based on the amount of those adjustments.

I hope that I said that clearly enough.

From: ------------------------------
Sent: Monday, October 06, 2008 3:27 PM
To: ----------------
Cc: ------------------
Subject: RE: Penalty Question

---------

I already spoke with --------------about this. Simply disclosing transactions under Rev. Proc. 94-69 does not get a taxpayer out of negligence or substantial understatement penalties automatically. What Rev. Proc. 94-69 does is simply treat a particular type of written statement, given at the beginning of the audit, as if it were a qualified amended return. So if the entire issue of whether either penalty applied was based on adequate disclosure, a statement under Rev. Proc. 94-69 could be treated the same as if a Form 8275 was attached to the tax return.

However, even with adequate disclosure, a penalty can be imposed "in the case of a position that does not have a reasonable basis or where the taxpayer fails to keep adequate books and records or to substantiate items properly." Treas. Reg. 1.6662-3(c)(1). Also, the "adequate disclosure" exception to the substantial understatement penalty does not apply to tax shelter items. Treas. Reg. 1.6662-4(g)(1)(iii).

-----, please let us know if I have written anything above you disagree with.

Thanks,
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