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Uncertain of a New TCJA rule? Do This to Avoid Penalties

Thanks to the Tax Cuts and Jobs Act (TCJA) tax reform, you have thousands of pages of new tax rules and not a lot of guidance on many of them.

Let’s say you want to take a certain tax-deduction position on your tax return, but you think it could go either way based on how someone reads the law.

Why Worry?

Penalties! The tax code has special penalties that apply to both you and your tax advisor for what the law calls a substantial understatement of tax liability.

For you. You face a 20 percent accuracy-related penalty when your tax liability is understated by the greater of

  • 10 percent (5 percent for Section 199A claims), or
  • $5,000.

For me. If your tax preparer understates your tax liability because of an unreasonable position as defined by tax law, your preparer faces penalties equal to the greater of

  • $1,000 ($5,000 if willful or reckless), or
  • 50 percent of the fees for preparing the return or claim (75 percent if willful or reckless).

Options

We have two options:

  1. Take the position and properly disclose it on the return.
  2. Do not take the position, wait for clarity, and then file an amended return to claim your refund.

Disclosure is the proactive strategy designed to prevent you from incurring the penalties above if the IRS later disallows your tax deduction.

To avoid the trouble, we must ensure that your tax return adequately discloses the position. In general, this requires that the return have a properly completed Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement).

The position we take for you must have a reasonable basis in the law. Reasonable basis is more than being “not frivolous,” “not improper,” or “merely arguable”; it has to be reasonably rooted in at least one relevant tax authority.

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