Recently, the IRS issued Revenue Procedure 2020-54, which updated Revenue Procedure 2019-42. Specifically, this new Revenue Procedure identifies circumstances under which the taxpayer makes an adequate disclosure on a taxpayer’s income tax return regarding an item or position for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns.

To give some context, the IRS may charge a 20% addition to tax for any “substantial understatement of tax” under section 6662. Generally, a substantial understatement of tax exists if the amount of the understatement exceeds the greater of (i) 10% of the amount of tax required to be shown on the return for the tax year or (ii) $5,000. I.R.C. § 6662(d)(1)(A). An “understatement” is the excess of (i) the amount of the tax required to be shown on a return for the tax year, over (ii) the amount of the tax imposed which is shown on the return, reduced by any rebate (within the meaning of I.R.C. § 6211(b)(2)). I.R.C. § 6662(d)(2)(A). Special rules for determining understatements apply to corporations and individuals utilizing § 199A QBI deductions. See I.R.C. § (d)(1)(B), (d)(1)(C).

Read More