Reporting tax return positions inconsistent with IRS authority – between “a rock and a hard place”

Purpose – The purpose of this paper is to highlight the quandary that a taxpayer may be in when choosing between disclosing a tax return position that may be contrary to Internal Revenue Service (IRS) authorities and potentially subjecting the taxpayer to substantial penalties if the position is not disclosed. Design/methodology/approach – The paper describes the technical rules applicable to tax return disclosures and IRS forms and provides several examples relating to hedge funds. Findings – The tensions between disclosure, possibly triggering an IRS audit, and nondisclosure, possibly resulting in substantial penalties, are not easily resolvable. In addition, financial accounting reporting of uncertain tax positions (FIN 48) must also be considered in weighing the alternatives. Originality/value – The paper provides timely guidance from experts on tax issues relating to tax return presentation in general, and to tax issues of hedge funds in particular.