Adequate disclosure and the IRS’s strategy of more information reporting

By Mark Heroux, J.D.

Editor: Uzell T. Freeman-Williams, CPA

Many practitioners will recall from their formal tax training that when it comes to adequate disclosure of an item on a tax return, generally, a taxpayer must provide sufficient information so that the IRS can make a determination of an item based on the facts, issue, taxpayer's positions, and the dollar amount associated with it. The IRS provides much guidance in this area, including Rev. Proc. 2021-52, the current annual statement on adequate disclosure for purposes of Secs. 6662(d) and 6694(a). Specific instructions in regulations and forms add to the adequate-disclosure rules. As a result, there is significant risk when preparing a tax return and determining whether all items are adequately disclosed.

The IRS has taken steps to increase the information reporting burden on taxpayers. Notice 2007-83, making an identified abusive trust arrangement a listed transaction, requires taxpayers to disclose substantial information regarding these transactions. Notice 2016-66 requires taxpayers involved in certain microcaptive insurance arrangements to disclose substantial information regarding these "transactions of interest." Recently, the IRS issued new instructions to Schedules UTP, Uncertain Tax Position Statement; K-2, Partners' Distributive Share Items — International [or Shareholders' Pro Rata Share Items — International]; and K-3, Partner's [or Shareholder's] Share of Income, Deductions, Credits, etc. — International, that require substantially more information than has been acceptable in the past (Schedule UTP) and substantially more information than may be available to the taxpayer (Schedules K-2 and K-3). And Field Attorney Advice (FAA) 20214101F requires substantially more information to support a research credit refund claim than has been acceptable in the past.

Other government agencies are increasing the reporting pressure. The FinCEN Corporate Transparency Act proposed regulations (86 Fed. Reg. 69,920 (Dec. 8, 2021)) are evidence of such pressure. Tax practitioners and their organizations, including the AICPA, objected to these reporting requirements to no avail (see AICPA comment letter dated May 5, 2021).

Recently, two courts have spoken, holding that the IRS's information reporting efforts violate the Administrative Procedure Act (APA). In Mann Construction, Inc., No. 21-1500 (6th Cir. 3/3/22), the Sixth Circuit, reversing a district court, held that the disclosure requirements of Notice 2007-83 were such that the IRS was required to comply with the APA. In CIC Services, LLC, No. 3:17-cv-110 (E.D. Tenn. 3/21/22), a district court held that the IRS was required to comply with the APA for the disclosure requirements of Notice 2016-66. The court ordered the IRS to return the documents obtained from the disclosure. However, it did not grant the plaintiffs' request to prohibit the IRS from using the information obtained in response to the notice if it was obtained lawfully by other means.

What to do?

What is a practitioner to do? Unless your client is willing to be a test case, one recommendation is to attempt in good faith to meet the disclosure rules, including IRS pronouncements that arguably should have first gone through the APA process.

What does this mean in light of the research credit refund claim reporting requirements of FAA 20214101F? It means providing all the documentation that shows uncertainty, a process of experimentation to remove uncertainty, and a new or improved business product or process (business component) that results from the process of experimentation. Arguably, this means providing every document generated in any process that might include qualified research. At a minimum, a practitioner should strongly consider attaching a detailed research credit study with supporting documentation.

If a taxpayer wants to challenge the FAA on APA failure grounds, be mindful of the refund statute of limitation and think about submitting all the supporting documentation before the refund statute of limitation expires. It would be a shame to have a great research credit claim but lose it on a righteous procedural position should a court rule in a future case that the IRS did not have to follow the APA prior to issuing the FAA.

What does this mean in terms of disclosures required by Notice 2016-66? It means that taxpayers residing in the Sixth Circuit (Michigan, Ohio, Kentucky, and Tennessee) do not have to disclose their microcaptive transactions. All other taxpayers must continue to disclose microcaptive activity that meets the criteria of Notice 2016-66.

What does this mean in terms of disclosures required by Schedules UTP, K-2, and K-3? As with the FAA, practitioners are encouraged to consider overdisclosing or making a good-faith effort to disclose as fully as they might think an IRS agent would want them to disclose.

Bottom line

Practitioners must ask themselves: Do I want to take the risk of not sufficiently disclosing? The IRS's attempts to gather more information to more efficiently regulate have been recently ruled to have exceeded the agency's authority. These taxpayer victories are Pyrrhic. Yes, in Mann Construction the IRS will have to abate a penalty. But the courts did not impose any damages on the IRS; the Service had to return the documents to the taxpayers. The IRS can still use the records in Examination, Appeals, and at trial.

Practitioners must have detailed conversations with their clients about the disclosure rules and have their clients decide what to disclose and how to disclose it.



Mark Heroux, J.D., is a tax principal in the Tax Advocacy and Controversy Services practice at Baker Tilly US LLP in Chicago and is a member of the AICPA Tax Practice & Procedures Committee. For more information on this article, contact

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.