Navigating IRS Form 8275: Key Takeaways from Fact Sheet 2024-32 on IRC Section 280E Disclosure Standards

On Thursday, December 12, 2024, the Internal Revenue Service (“IRS”) released a fact sheet addressing Form 8275 and the disclosure of tax positions related to IRC section 280E. 

Form 8275 is used by taxpayers to disclose positions taken on tax returns for which substantial authority does not exist. Substantial authority is defined as a tax return position that has more than a 40% chance of success based upon its merits. Any positions for which substantial authority does not exist, Form 8275 is required to be included on a tax return in order for taxpayers to be eligible for protection from the assessment of certain accuracy-related or substantial understatement penalties, should the position be challenged and reversed upon examination.

The IRS’ Fact Sheet 2024-32 includes guidance for properly filing Form 8275 disclosures. The Fact Sheet reminds taxpayers that for a disclosure to be valid, and thus provide a penalty protection, it must provide a reasonable basis for taking the position. The IRS continues, “Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is only arguable.” Usually, reasonable basis requires at least a 20% chance of success. In summary the article provides a strongly worded conclusion that directs taxpayers that a position that fails to meet the reasonable basis standard will not provide protection to the taxpayer. In citing examples of disclosures lacking reasonable basis, the IRS refers to “some disclosures received with respect to IRC Section 280E.” They do not elaborate or list specific examples.

When discussing the potential for our clients to take positions related to nonapplication of IRC Section 280E, we have always discussed the realistic expectation that a resolution will most likely be determined at IRS appeals or even Tax Court or the Court of Appeals. The real question is whether your legal opinion bears enough substance to actually be considered a reasonable basis for the position contrary to the blanket default position in the Fact Sheet published by the Internal Revenue Service.