SPECIAL PROCEDURE IS PROVIDED FOR TAXPAYERS SUBJECT TO THE COORDINATED EXAMINATION PROGRAM TO SHOW ADDITIONAL TAX OR TO MAKE A DISCLOSURE TO WAIVE SEC. 6661 PENALTY

Rev. Proc. 85-26

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide a special procedure for taxpayers that are subject to the Coordinated Examination Program (CEP) to show additional tax or make adequate disclosure with respect to an item for purposes of obtaining an automatic waiver of the penalty imposed by section 6661 of the Internal Revenue Code.

SEC. 2. BACKGROUND

01 Section 6661(a) of the Code provides for an addition to tax equal to 10 percent of the amount of any underpayment attributable to a substantial understatement of income tax for any taxable year.

02 Under section 1.6661-2(d)(2) of the Income Tax Regulations, the substantial understatement penalty is computed without regard to any amount of additional tax shown on an amended return, so-called. In the case of additional tax shown or adequate disclosure made on a "qualified amended return," however, section 1.661-6(c) provides for an automatic waiver of any penalty that would not have been imposed if the additional tax had been shown or the adequate disclosure had been made in the original return of the taxpayer. Section 1.6661-4 describes what constitutes adequate disclosure.

03 A qualified amended return is defined, generally, as an amended return, so-called, filed after the due date of the return and before the time the taxpayer is first contacted concerning an examination of the return.

04 In the case of a CEP taxpayer, the time of the first contact concerning an examination of the return is not an appropriate criterion because, generally, all returns of CEP taxpayers are examined. In addition, it is unclear whether a statement furnished to the examining agent at the commencement of the examination constitutes an amended return for purposes of section 1.6661-6(c) of the regulations.

SEC. 3. QUALIFIED AMENDED RETURN

01 For purposes of section 1.6661-6(c) of the regulations, a written statement furnished by a CEP taxpayer to the revenue agent responsible for examining its return is treated as a qualified amended return if the written statement is described in section 3.02 below and is furnished after the due date of the return and before the day that is 10 days after the earliest of,

(a) The day the taxpayer receives a written confirmation of the meeting described in section 3.01(b) below,

(b) The day the taxpayer formally meets with the examining agent for the first time with respect to the examination of the relevant taxable year, or,

(c) The day the taxpayer first receives a written request for information with respect to the examination of the relevant taxable year.

02 A written statement is described in this section 3.02 if it includes:

(a) The caption "Furnished under Rev. Proc. 85-26."

(b) A description of the nature and the amount of all items that would result in adjustments and that the taxpayer would have reported if, in lieu of furnishing a written statement, the taxpayer had then filed a properly completed amended return, and

(c) The following declaration signed by a person authorized to sign the return of the taxpayer: "Under penalties of perjury, I declare that I have examined this written statement, and to the best of my knowledge and belief this written statement is true, correct and complete."

03 A written statement need not include a recomputation of tax liability. Similarly, if an item automatically affects another item, the written statement need not include a recomputation of the affected item. For example, if the taxpayer's written statement identifies an increase in ending inventory and states the amount of the increase, an item resulting in adjustments has been described with the specificity required in section 3.02(b) above. The written statement need not include a recomputation of tax liability resulting from the increase in ending inventory. Similarly, the written statement need not identify the existence and amount of the decrease in the cost of goods sold that results from the increase in ending inventory.

04 Any additional tax liability that would result from adjustments identified in a written statement described in section 3.01 and 3.02 above shall be treated as an additional amount of tax shown on a qualified amended return. Similarly, if, on a written statement described in section 3.01 and 3.02 above, the taxpayer makes adequate disclosure with respect to an item in the manner prescribed in section 1.6661-4 of the regulations, such disclosure shall be treated as adequate disclosure made in a statement attached to a qualified amended return.

SEC. 4. EFFECTIVE DATE

This revenue procedure applies to returns whose due date (determined without regard to extensions of the time for filing) is after December 31, 1982.