Tax advisers emphasize the importance of disclosure in tax filings, as it can help reduce the risk of audit and penalties. Disclosure involves providing additional explanations for certain tax positions that may not have substantial legal support. Failure to disclose a tax position that lacks substantial authority could result in penalties from the IRS. By disclosing questionable positions, taxpayers can potentially avoid penalties and prevent the IRS from extending the usual three-year limitations period for assessing income tax.
Although disclosing is not mandatory, it is often in the best interest of taxpayers to do so. The IRS takes into account what is disclosed when determining if income has been omitted from a return, even if the taxpayer states that it is not taxable. Additionally, there is a penalty for substantial understatements of income tax, which can be avoided by adequately disclosing the item in question and providing a reasonable basis for the tax position. The classic way to disclose a tax position is through Form 8275, which is a common form that does not automatically trigger an audit.
It is important to provide enough detail in a disclosure to inform the IRS of the taxpayer’s actions, but going overboard with excessive information is unnecessary and unwise. Some taxpayers have been known to attach full legal agreements or lengthy arguments about the law to their disclosures, which is not appropriate. The purpose of disclosure is to provide the necessary information to the IRS in a clear and concise manner. By keeping the disclosure short and to the point, taxpayers can effectively communicate their tax positions without raising unnecessary red flags.
Overall, the act of disclosure involves more than just listing income or expenses on a tax return. It requires taxpayers to provide additional explanations for certain tax positions that may be questionable or lacking substantial legal support. While disclosing is not mandatory, it can help taxpayers avoid penalties and extend the statute of limitations period for income tax assessment. By using forms such as Form 8275, taxpayers can effectively disclose their tax positions in a clear and concise manner without triggering unnecessary audits or scrutiny from the IRS. In conclusion, understanding the importance of disclosure in tax filings can help taxpayers navigate the complexities of tax law and minimize their risk of audit and penalties.
