3.3 Substantiation, Disclosure, and FBAR Reporting

Adequate records, and the wall at section 274

IRC § 6001 requires every person liable for tax to keep records, render statements, and comply with regulations. For REG, that sentence is operational: if the return claims a deduction, credit, or exclusion, the file must be able to prove it. Bank statements, invoices, mileage logs, appointment calendars, and closing files are the ordinary tools. "The client told me" is not a record.

When records are incomplete, courts sometimes estimate an allowable amount under Cohan v. Commissioner if the taxpayer proves that some deductible amount was spent and there is a reasonable basis to approximate. Cohan is a reconstruction safety net, not a planning method. It does not invent a deduction from a round number on a workpaper. And it stops at IRC § 274(d).

Section 274(d) imposes strict substantiation for listed categories, taught at REG level as travel, meals, and listed property (passenger automobiles and certain other property used for transportation or entertainment). For those items the taxpayer must substantiate—generally contemporaneously—amount, time, place, and business purpose (and business relationship, where gifts or entertainment-type facts still matter). A reconstructed "about $8,000 of travel" will not do. If the log was not kept, the deduction is often zero even though everyone believes trips occurred. That is the exam trap: Cohan for ordinary supplies; no Cohan for 274(d) items.

Listed-property rules also push toward business-use percentage evidence. A car used in a trade or business still needs mileage or other use records that separate commuting and personal miles. REG will not ask you to recite every listed-property subcategory that Congress later narrowed; it will ask whether the file contains the elements § 274(d) names.

Disclosing a tax return position: 8275 and 8275-R

Blueprint tasks for this topic include summarizing appropriate disclosure of a tax return position, identifying when disclosure is required, and judging whether substantiation is sufficient. Those are different questions from "is the position correct."

Form 8275, Disclosure Statement, is filed with the return to disclose a position that is not a regulation-contrary position. Form 8275-R, Regulation Disclosure Statement, is the counterpart when the position is contrary to a Treasury regulation. Neither form is a confession that the position is wrong. Each is a statement of facts, issues, and authorities so the IRS can see what was done.

Penalty geography, at REG altitude:

• Substantial authority (Treas. Reg. § 1.6662-4(d)) is an objective standard—more than reasonable basis, less than more-likely-than-not. If substantial authority exists for a non-tax-shelter item, that item is generally out of the substantial-understatement penalty computation without Form 8275.
• If the position has only reasonable basis, adequate disclosure on Form 8275 or 8275-R can take a non-shelter item out of that same understatement penalty. Disclosure does not cure fraud, and it is not a general negligence eraser.
• Tax-shelter and reportable-transaction positions are tighter. A significant purpose of tax avoidance pushes the standard toward more likely than not, and disclosure on 8275 is not a substitute for the reportable-transaction rules.

So: substantial authority → disclosure often unnecessary for the understatement penalty. Reasonable basis without substantial authority → disclose if you want that penalty protection. No reasonable basis → do not take the position, with or without a form.

Reportable and listed transactions, only as high as the forms go

A reportable transaction is one the Secretary has identified, by regulation under IRC § 6011, as having a potential for tax avoidance. A listed transaction is a reportable transaction that is the same as, or substantially similar to, a transaction the IRS has identified as tax avoidance in published guidance. The taxpayer disclosure statement is Form 8886, Reportable Transaction Disclosure Statement—not Form 8275. Material advisors have a separate return (Form 8918). Failure to disclose listed and other reportable transactions has its own penalty statute (IRC § 6707A). You do not need a promoter-seminar fact pattern to know the hierarchy: 8886 is not optional cosmetic disclosure, and attaching 8275 does not satisfy § 6011.

If you cannot verify a form number, do not invent one. The three numbers REG actually uses in this corner are 8275, 8275-R, and 8886.

FBAR is FinCEN Form 114, not a 1040 schedule

The Bank Secrecy Act requires certain United States persons (citizens, residents, and domestic entities, including corporations, partnerships, LLCs, trusts, and estates) to report a financial interest in, or signature or other authority over, foreign financial accounts if the aggregate value exceeded $10,000 at any time during the calendar year. The report is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (FBAR), filed electronically through FinCEN's BSA E-Filing System. The IRS page is explicit: you do not file the FBAR with the federal income tax return. Whether the account produced taxable income is irrelevant to the filing trigger.

Due date, current FinCEN/IRS rule. The FBAR is due April 15 following the calendar year reported. Filers receive an automatic extension to October 15; no extension request is required. That automatic six-month extension is a BSA rule, not Form 4868. FinCEN has also separately extended deadlines for certain employees who have signature authority only (no financial interest) over employer accounts; that is a special-population notice, not the default rule you apply to a client's own two accounts.

Keep, for five years from the FBAR due date, the name on the account, account number, foreign bank name and address, type of account, and maximum value during the year. Civil FBAR penalties are inflation-adjusted; willfulness is a facts-and-circumstances inquiry. REG wants the trigger and the filing channel more than a penalty table.

FATCA Form 8938 is a different return. Form 8938, Statement of Specified Foreign Financial Assets, is an IRS information return attached to the income tax return. The IRS comparison chart states that Form 8938 does not replace the FBAR. Thresholds are higher than $10,000 and depend on filing status and whether the specified individual lives in the United States or abroad (a commonly taught U.S. unmarried baseline is more than $50,000 on the last day of the year or more than $75,000 at any time). REG's own policy is not to test inflation-indexed limitation amounts, so learn the contrast rather than a memorized eight-cell table: FBAR = BSA, FinCEN 114, $10,000 aggregate, April 15/October 15; Form 8938 = IRS, attached to the 1040, higher and status-dependent. A taxpayer can have to file both, one, or neither.

Worked scenario: two foreign accounts totaling $12,000

A client has a €-denominated checking account and a Canadian brokerage account. The two accounts' values, converted to U.S. dollars, total $12,000. The client asks whether an FBAR is needed because "neither account is over $10,000" and "there was almost no interest."

Answer the question in four beats:

1. Aggregate, not per account. The BSA test is whether the aggregate value of the foreign financial accounts exceeded $10,000 at any time during the calendar year. Two accounts totaling $12,000 are over the line even if each is $6,000.
2. Interest does not matter. An account with no taxable income is still a foreign financial account for FBAR purposes.
3. File FinCEN Form 114, electronically with FinCEN, by April 15 (or by the automatic October 15 extension). Do not attach it to Form 1040. Do not assume Form 8938 is required; $12,000 is over FBAR and typically under Form 8938's higher thresholds, but you still run the 8938 analysis separately.
4. Keep the max-value records. If the client does not know which day the combined peak occurred, reconstruct from periodic statements. Guessing "about $9,900 so we can skip it" is how non-willful facts become ugly facts.

Substantiation, disclosure, and FBAR are three different compliance machines. REG's job is to keep them from collapsing into one vague "tell the IRS everything" instinct.