What Are Tax Return Disclosure Requirements?

A tax return disclosure is a formal statement attached to a tax return that provides the Internal Revenue Service (IRS) with additional information about a position taken. Its purpose is to create transparency by alerting the IRS to a specific or potentially controversial tax treatment. This proactive explanation of the basis for a tax position can mitigate certain penalties. The disclosure does not guarantee that the IRS will agree with the position, nor does it prevent the tax return from being selected for an audit.

Situations Requiring Tax Return Disclosure

Avoiding the Substantial Understatement Penalty

One of the most common reasons for a disclosure is to seek protection from the accuracy-related penalty for a “substantial understatement” of income tax. For an individual, an understatement is substantial if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. For taxpayers who claim the Qualified Business Income Deduction, a lower threshold applies, where an understatement is substantial if it exceeds the greater of $5,000 or 5% of the required tax. For most corporations, the threshold is met if the understatement is more than the lesser of $10,000,000, or 10% of the required tax ($10,000 if greater).

A taxpayer can often avoid this penalty by making an adequate disclosure, provided the position has at least a “reasonable basis,” which is a standard higher than being frivolous.

Positions Contrary to Regulations

A disclosure is also required when a taxpayer takes a position on their return that is contrary to a published Treasury Regulation. Treasury Regulations are the official interpretations of the Internal Revenue Code. Taking a position against a regulation requires the taxpayer to have a reasonable basis and represent a good-faith challenge to the validity of the regulation itself.

Reportable Transactions

Disclosure is mandatory for participation in “reportable transactions,” which are specific arrangements the IRS has identified as having a potential for tax avoidance. The failure to disclose these transactions carries its own set of penalties. The main categories of these transactions include:

• Listed Transactions, which are specific tax avoidance schemes identified by the IRS.
• Confidential Transactions, which are offered under conditions of secrecy.
• Transactions with Contractual Protection, where fees are refundable if tax benefits are not sustained.
• Loss Transactions that exceed specific dollar thresholds.
• Transactions of Interest, which the IRS has flagged for further scrutiny.

Information and Forms Needed for Disclosure

Form 8275, Disclosure Statement

The primary document for disclosing a tax position to avoid the substantial understatement penalty is Form 8275, Disclosure Statement. The taxpayer must clearly identify the tax year for which the disclosure is being made. Completing the form requires a precise description of the tax item, including its dollar amount. The taxpayer must also provide a detailed explanation of all relevant facts and present a clear legal basis for their position, referencing authorities such as court cases or revenue rulings.

Form 8275-R, Regulation Disclosure Statement

When a taxpayer’s position is directly contrary to an established Treasury Regulation, Form 8275-R, Regulation Disclosure Statement, must be used. This form requires the taxpayer to explicitly identify the full citation of the Treasury Regulation being challenged. The explanation must provide the basis for the good-faith challenge to the regulation’s validity.

Form 8886, Reportable Transaction Disclosure Statement

For the mandatory disclosure of reportable transactions, taxpayers must use Form 8886, Reportable Transaction Disclosure Statement. On this form, the taxpayer must identify the name of the transaction, if applicable, and indicate which category it falls into. The form also requires a factual description of the transaction, the expected tax benefits, and the identification of all other parties involved, such as promoters.

The Disclosure Submission Process

Attaching to the Tax Return

Once completed, the appropriate disclosure form must be submitted with the taxpayer’s income tax return for that year. For paper returns, the form is physically attached. For electronic filings, tax preparation software is used to attach a PDF of the form to the e-filed return transmission, and it is important to ensure the attachment is correctly included.

Submitting to the Office of Tax Shelter Analysis (OTSA)

A special dual-filing requirement applies to Form 8886. In addition to being attached to the tax return, a separate copy of the completed Form 8886 must be mailed directly to the IRS Office of Tax Shelter Analysis (OTSA) at: Internal Revenue Service, 1973 North Rulon White Blvd., LB&I:OTSA – M/S 4916, Ogden, UT 84201.

What to Expect After Submission

After a disclosure statement is filed, the taxpayer should not expect to receive a confirmation from the IRS. The submission serves as the official notification. Filing a disclosure puts the IRS on notice of the tax position, but it does not imply that the IRS agrees with it or has approved it.

Penalties for Failure to Disclose

Accuracy-Related Penalty

The primary consequence of failing to disclose a questionable tax position is the potential imposition of the accuracy-related penalty under Internal Revenue Code Section 6662. This penalty is 20% of the tax underpayment attributable to the position. Without a disclosure, if the IRS examines the return and disallows the position, the penalty will likely be asserted in addition to back taxes and interest.

Penalties for Reportable Transactions

The penalties for failing to disclose a reportable transaction on Form 8886 are governed by Internal Revenue Code Section 6707A. The penalty is 75% of the decrease in tax from the transaction, subject to minimum and maximum amounts. For an individual, the maximum penalty is $10,000 for a reportable transaction or $100,000 for a listed transaction. For any other entity, the maximum is $50,000 for a reportable transaction or $200,000 for a listed transaction.

Other Consequences

Beyond monetary penalties, failing to file the required Form 8886 for certain reportable transactions can extend the statute of limitations for the IRS to assess tax. For some undisclosed listed transactions, the statute of limitations can remain open indefinitely until the required disclosure is provided. This gives the IRS a much longer window to audit the return.

Foreign Financial Account and Asset Disclosures

Form 8938, Statement of Specified Foreign Financial Assets

Separate from tax position disclosures, U.S. persons have obligations related to foreign financial assets, reported on Form 8938, Statement of Specified Foreign Financial Assets. This form is required for taxpayers who have an interest in such assets and meet aggregate value thresholds, which vary by filing status and location. Specified foreign financial assets include accounts at foreign institutions, stock issued by a non-U.S. person, and interests in foreign entities.

FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

A distinct reporting requirement is the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is not filed with the IRS but separately with the Financial Crimes Enforcement Network (FinCEN). The filing deadline for the FBAR is automatically extended to October 15th each year. A U.S. person must file an FBAR if they have a financial interest or signature authority over foreign accounts whose aggregate value exceeded $10,000 during the year.

Penalties

Failure to file Form 8938 can result in a $10,000 penalty, with additional penalties up to $50,000 for continued non-compliance, plus a 40% accuracy-related penalty on any tax underpayment. FBAR penalties can be civil or criminal. For penalties assessed in 2025, a non-willful failure to file can result in a civil penalty up to $16,536 per violation, while a willful failure can lead to a penalty of the greater of $165,353 or 50% of the unreported account balance.