rp-19-9.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also: Part 1, §§ 6662, 6694, 1.6662-4, 1.6694-2)

Adequate Disclosure Revenue Procedure Renewal

Rev. Proc. 2019-9

SECTION 1. PURPOSE
This revenue procedure updates Rev. Proc. 2018-11, 2018-5 I.R.B. 335, and
identifies circumstances under which the disclosure on a taxpayer's income tax return
with respect to an item or position is adequate 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. This revenue procedure does not apply with respect to any other penalty
provisions (including but not limited to the disregard provisions of the section 6662(b)(1)
accuracy-related penalty, the section 6662(b)(6) accuracy-related penalty and the
section 6662(i) increased accuracy-related penalty in the case of nondisclosed
noneconomic substance transactions, and the section 6662(j) increased accuracy-

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related penalty in the case of undisclosed foreign financial asset understatements). If
this revenue procedure does not include an item, disclosure is adequate with respect to
that item only if made on a properly completed Form 8275 or 8275-R, as appropriate,
attached to the return for the year or to a qualified amended return. See Treas. Reg.
§ 1.6664-2(c) for information about qualified amended returns.
This revenue procedure applies to any income tax return filed on 2018 tax forms
for a taxable year beginning in 2018, and to any income tax return filed in 2019 on 2018
tax forms for short taxable years beginning in 2019.
SECTION 2. CHANGES FROM REV. PROC. 2018-11
Editorial changes have been made throughout this revenue procedure. In
addition, minor changes have been made in order to update the taxable years and tax
forms to which this revenue procedure applies. No additional substantive changes have
been made.
SECTION 3. BACKGROUND
.01 If section 6662 applies to any portion of an underpayment of tax required to
be shown on a return, an amount equal to 20 percent of the portion of the
underpayment is added to the tax. The penalty rate increases to 40 percent in the case
of gross valuation misstatements under section 6662(h), nondisclosed noneconomic
substance transactions under section 6662(i), or undisclosed foreign financial asset
understatements under section 6662(j). Section 6662(b)(2) applies to the portion of an
underpayment of tax that is attributable to a substantial understatement of income tax.

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.02 There is a substantial understatement of income tax if the amount of the
understatement exceeds the greater of (i) 10 percent of the amount of tax required to be
shown on the return for the taxable year or (ii) $5,000. Section 6662(d)(1).
Section 6662(d)(1)(B) provides a special rule for corporations. A corporation (other than
an S corporation or a personal holding company) has a substantial understatement of
income tax if the amount of the understatement exceeds the lesser of (i) 10 percent of
the tax required to be shown on the return for a taxable year (or, if greater, $10,000) or
(ii) $10,000,000. An understatement is the excess of the amount of tax required to be
shown on the return for the taxable year over the amount of the tax that is shown on the
return reduced by any rebate. Section 6662(d)(2).
.03 In the case of an item not attributable to a tax shelter, if the taxpayer has a
reasonable basis for the tax treatment of the item, the amount of the understatement is
reduced by the portion of the understatement attributable to the item with respect to
which the relevant facts affecting the item's tax treatment are adequately disclosed in
the return or in a statement attached to the return. Section 6662(d)(2)(B)(ii).
.04 Section 6694(a) imposes a penalty on a tax return preparer who prepares a
return or claim for refund reflecting an understatement of liability due to an
“unreasonable position” if the tax return preparer knew (or reasonably should have
known) of the position. A position (other than a position with respect to a tax shelter or
a reportable transaction to which section 6662A applies) is generally treated as
unreasonable unless (i) there is or was substantial authority for the position, or (ii) the
position was properly disclosed in accordance with section 6662(d)(2)(B)(ii)(I) and had a

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reasonable basis. If the position is with respect to a tax shelter (as defined in
section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A applies, the
position is treated as unreasonable unless it is reasonable to believe that the position
would more likely than not be sustained on the merits. See Notice 2009-5, 2009-3
I.R.B. 309, for interim penalty compliance rules for tax shelter transactions.
.05 In general, this revenue procedure provides guidance for determining when
disclosure by return is adequate for purposes of section 6662(d)(2)(B)(ii) and
section 6694(a)(2)(B). For purposes of this revenue procedure, the taxpayer must
furnish all required information in accordance with the applicable forms and instructions,
and the money amounts entered on these forms must be verifiable.
.06 This revenue procedure may apply to a return for a fiscal tax year that begins
in 2018 and ends in 2019. This revenue procedure may also apply to a short year
return for a period beginning in 2019 if the return is to be filed before the 2019 forms are
available. (Note that individuals are generally not put in this position. The most
frequent situation in which a short year arises is when filing a decedent's final return for
a fractional part of a year. In that situation, the 2019 form will be available because the
final return is due the fifteenth day of the fourth month following the close of the 12-
month period that began with the first day of such fractional part of the year (meaning
the due date is not accelerated). See Treas. Reg. § 1.6072-1(b).) In the case of fiscal
year and short year returns, the taxpayer must take into account any tax law changes
that are effective for tax years beginning after December 31, 2018, even though these
changes are not reflected on the form or instructions.

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.07 This document does not take into account the effect of tax law changes
effective for tax years beginning after December 31, 2018. If a line referenced in this
revenue procedure is affected by such a change and requires additional reporting, a
taxpayer may have to file Form 8275, Disclosure Statement, or Form 8275-R,
Regulation Disclosure Statement, until the Service prescribes criteria for complying with
the requirement.
.08 A complete and accurate disclosure of a tax position on the appropriate
year’s Schedule UTP, Uncertain Tax Position Statement, will be treated as if the
corporation filed a Form 8275 or Form 8275-R regarding the tax position. The filing of a
Form 8275 or Form 8275-R, however, will not be treated as if the corporation filed a
Schedule UTP.
SECTION 4. PROCEDURE
.01 General
(1) Additional disclosure of facts relevant to, or positions taken with respect to,
issues involving any of the items set forth below is unnecessary for purposes of
reducing any understatement of income tax under section 6662(d) (except as otherwise
provided in section 4.02(3) concerning Schedules M-1 and M-3), provided that the forms
and attachments are completed in a clear manner and in accordance with their
instructions.
(2) The money amounts entered on the forms must be verifiable, and the
information on the return must be disclosed in the manner described below. For
purposes of this revenue procedure, a number is verifiable if, on audit, the taxpayer can

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prove the origin of the amount (even if that number is not ultimately accepted by the
Internal Revenue Service) and the taxpayer can show good faith in entering that
number on the applicable form.
(3) The disclosure of an amount as provided in section 4.02 below is not
adequate when the understatement arises from a transaction between parties who are
related within the meaning of section 267(b). If an entry may present a legal issue or
controversy because of a related-party transaction, then that transaction and the
relationship must be disclosed on a Form 8275 or Form 8275-R.
(4) When the amount of an item is shown on a line that does not have a
preprinted description identifying that item (such as on an unnamed line under an “Other
Expense” category), the taxpayer must clearly identify the item by including the
description on that line. For example, to disclose a bad debt for a sole proprietorship,
the words “bad debt” must be written or typed on the line of Schedule C that shows the
amount of the bad debt. Also, for Schedule M-3 (Form 1120), Part II, line 25, Other
income (loss) items with differences, or Part III, line 37, Other expense/deduction items
with differences, the entry must provide descriptive language; for example, "Cost of non-
compete agreement deductible not capitalizable,” and the description must be provided
on an attachment. Similarly, for other forms, if space limitations on a form do not allow
for an adequate description, the description must be continued on an attachment.
(5) Although a taxpayer may literally meet the disclosure requirements of this
revenue procedure, the disclosure will have no effect for purposes of the section 6662
accuracy-related penalty if the item or position on the return: (1) does not have a

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reasonable basis as defined in Treas. Reg. § 1.6662-3(b)(3); (2) is attributable to a tax
shelter item as defined in section 6662(d)(2)(C)(ii); or (3) is not properly substantiated or
the taxpayer failed to keep adequate books and records with respect to the item or
position.
(6) Disclosure also will have no effect for purposes of the section 6694(a) penalty
as applicable to tax return preparers if the position is with respect to a tax shelter (as
defined in section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A
applies.
.02 Items
(1) Form 1040, Schedule A, Itemized Deductions:
(a) Medical and Dental Expenses: Complete lines 1 through 4, supplying all
required information.
(b) Taxes: Complete lines 5 through 7, supplying all required information. Line 6
must list each type of tax and the amount paid.
(c) Interest Expenses: Complete lines 8 through 10, supplying all required
information. This section 4.02(1)(c) does not apply to (i) amounts disallowed under
section 163(d) unless Form 4952, Investment Interest Expense Deduction, is
completed, or (ii) amounts disallowed under section 265.
(d) Charitable Contributions: Complete lines 11 through 14, supplying all
required information and attaching all related forms required pursuant to statute or
regulation.
(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts,

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and attach to the return. Each item or article for which a casualty or theft loss is claimed
must be listed on Form 4684.
(2) Certain Trade or Business Expenses (including, for purposes of this section,
the following six expenses as they relate to the rental of property):
(a) Casualty and Theft Losses: The procedure outlined in section 4.02(1)(e)
must be followed.
(b) Legal Expenses: The amount claimed must be stated. This section does not
apply, however, to amounts properly characterized as capital expenditures, personal
expenses, or non-deductible lobbying or political expenditures, including amounts that
are required to be (or that are) amortized over a period of years.
(c) Specific Bad Debt Charge-off: The amount written off must be stated.
(d) Officers' Compensation: Complete Form 1125-E, Compensation of Officers,
when its instructions require. You must express the “percent of time devoted to
business” as a numerical percentage, rather than as a non-numerical description such
as "part" or "as needed." This section does not apply to "excess parachute payments,"
as defined in section 280G. This section does not apply to the extent that remuneration
paid or incurred exceeds an applicable employee-remuneration deduction limitation
under section 162(m).
(e) Repair Expenses: The amount claimed must be stated. This section does
not apply, however, to any amount properly characterized as capital expenditures or
personal expenses.
(f) Taxes (other than foreign taxes): The amount claimed must be stated.

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(3) Differences in book and income tax reporting:
For Schedule M-1 and all Schedules M-3, including those listed in (a)-(f) below,
the information provided must reasonably apprise the Service of the potential
controversy concerning the tax treatment of the item. If the information provided does
not so apprise the Service, a Form 8275 or Form 8275-R must be used to adequately
disclose the item (see Part II of the instructions for those forms).
Note: An item reported on a line with a pre-printed description, shown on an
attached schedule or “itemized” on Schedule M-1, may represent the aggregate
amount of several transactions producing that item (i.e., a group of similar items,
such as amounts paid or incurred for supplies by a taxpayer engaged in
business). In some instances, a potentially controversial item may involve a
portion of the aggregate amount disclosed on the schedule. The Service will not
be reasonably apprised of a potential controversy by the aggregate amount
disclosed. In these instances, the taxpayer must use Form 8275 or Form 8275-R
regarding that portion of the item.
Combining unlike items, whether on Schedule M-1 or Schedule M-3 (or on an
attachment when directed by the instructions), will not constitute an adequate
disclosure.
Additionally, taxpayers that file the Schedule M-3 (Form 1120), Net Income
(Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, may be
required to complete Schedule B (Form 1120), Additional Information for Schedule M-3
Filers. For further information, see Who Must File in the General Instructions for

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Schedule B (Form 1120). Taxpayers that file the Schedule M-3 (Form 1065), Net
Income (Loss) Reconciliation for Certain Partnerships, may be required to complete
Schedule C (Form 1065), Additional Information for Schedule M-3 Filers. For further
information, see Who Must File in the General Instructions for Schedule C (Form 1065).
When required, these schedules are necessary to constitute adequate disclosure:
(a) Form 1065. Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for
Certain Partnerships: Column (a), Income (Loss) per Income Statement, of Part II
(reconciliation of income (loss) items) and Column (a), Expense per Income Statement,
of Part III (reconciliation of expense/deduction items); Column (b), Temporary
Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d),
Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and
Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction
items).
(b) Form 1120. (i) Schedule M-1, Reconciliation of Income (Loss) per Books
With Income per Return.
(ii) Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for
Corporations With Total Assets of $10 Million or More: Column (a), Income (Loss) per
Income Statement, of Part II (reconciliation of income (loss) items) and Column (a),
Expense per Income Statement, of Part III (reconciliation of expense/deduction items);
Column (b), Temporary Difference, and Column (c), Permanent Difference, of Part II
(reconciliation of income (loss) items) and Part III (reconciliation of expense/deduction

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items); and Column (d), Income (Loss) per Tax Return, of Part II (reconciliation of
income (loss) items) and Column (d), Deduction per Tax Return, of Part III
(reconciliation of expense/deduction items).
(c) Form 1120-L. Schedule M-3 (Form 1120-L), Net Income (Loss)
Reconciliation for U.S. Life Insurance Companies With Total Assets of $10 Million or
More: Column (a), Income (Loss) per Income Statement, of Part II (reconciliation of
income (loss) items) and Column (a), Expense per Income Statement, of Part III
(reconciliation of expense/deduction items); Column (b), Temporary Difference, and
Column (c), Permanent Difference, of Part II (reconciliation of income (loss) items) and
Part III (reconciliation of expense/deduction items); and Column (d), Income (Loss) per
Tax Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction
per Tax Return, of Part III (reconciliation of expense/deduction items).
(d) Form 1120-PC. Schedule M-3 (Form 1120-PC), Net Income (Loss)
Reconciliation for U.S. Property and Casualty Insurance Companies With Total Assets
of $10 Million or More: Column (a), Income (Loss) per Income Statement, of Part II
(reconciliation of income (loss) items) and Column (a), Expense per Income Statement,
of Part III (reconciliation of expense/deduction items); Column (b), Temporary
Difference, and Column (c), Permanent Difference, of Part II (reconciliation of income
(loss) items) and Part III (reconciliation of expense/deduction items); and Column (d),
Income (Loss) per Tax Return, of Part II (reconciliation of income (loss) items) and
Column (d), Deduction per Tax Return, of Part III (reconciliation of expense/deduction
items).

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(e) Form 1120-S. Schedule M-3 (Form 1120-S), Net Income (Loss)
Reconciliation for S Corporations With Total Assets of $10 Million or More: Column (a),
Income (Loss) per Income Statement, of Part II (reconciliation of income (loss) items)
and Column (a), Expense per Income Statement, of Part III (reconciliation of
expense/deduction items); Column (b), Temporary Difference, and Column (c),
Permanent Difference, of Part II (reconciliation of income (loss) items) and Part III
(reconciliation of expense/deduction items); and Column (d), Income (Loss) per Tax
Return, of Part II (reconciliation of income (loss) items) and Column (d), Deduction per
Tax Return, of Part III (reconciliation of expense/deduction items).
(f) Form 1120-F. Schedule M-3 (Form 1120-F), Net Income (Loss) Reconciliation
for Foreign Corporations With Reportable Assets of $10 Million or More: Column (b),
Temporary Differences, Column (c), Permanent Differences, and Column (d), Other
Permanent Differences for Allocations to Non-ECI and ECI, of Part II (reconciliation of
income (loss) items) and Part III (reconciliation of expense/deduction items).
(4) Foreign Tax Items:
(a) International Boycott Transactions: Transactions disclosed on Form 5713,
International Boycott Report; Schedule A, International Boycott Factor (Section
999(c)(1)); Schedule B, Specifically Attributable Taxes and Income (Section 999(c)(2));
and Schedule C, Tax Effect of the International Boycott Provisions, must be completed
when required by their instructions.
(b) Treaty-Based Return Position: Transactions and amounts under
section 6114 or section 7701(b) as disclosed on Form 8833, Treaty-Based Return

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Position Disclosure Under Section 6114 or 7701(b), must be completed when required
by its instructions.
(5) Other:
(a) Moving Expenses: Complete Form 3903, Moving Expenses, and attach to
the return.
(b) Employee Business Expenses: Complete Form 2106, Employee Business
Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and attach
to the return. This section does not apply to club dues or to travel expenses for any
non-employee accompanying the taxpayer on the trip.
(c) Fuels Credit: Complete Form 4136, Credit for Federal Tax Paid on Fuels, and
attach to the return.
(d) Investment Credit: Complete Form 3468, Investment Credit, and attach to the
return.
SECTION 5. EFFECTIVE DATE
This revenue procedure applies to any income tax return filed on a 2018 tax form
for a taxable year beginning in 2018 and to any income tax return filed on a 2018 tax
form in 2019 for a short taxable year beginning in 2019.
SECTION 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Casey R. Conrad of the Office
of Associate Chief Counsel (Procedure & Administration). For further information
regarding this revenue procedure, contact Branch 2 of Procedure and Administration at
(202) 317-6844 (not a toll free call).