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Are you considering a bold tax position that may significantly reduce your taxes? If approved by the IRS, it’s a win. But if disapproved, be prepared to face a considerable tax penalty.

The IRS imposes a 20 percent penalty for substantial tax underpayment. For instance, if the IRS finds you underpaid your taxes by $50,000, you’ll face a $10,000 penalty in addition to the tax due and interest.

The tax code considers a tax underpayment “substantial” if you understate your tax by over 10 percent or $5,000, whichever is greater. If you claimed the qualified business income (Section 199A) deduction on your return, the 10 percent becomes 5 percent.

To avoid this penalty, you can adequately disclose on IRS Form 8275 the item causing the understatement on your return (or amended return). You’ll need to demonstrate a “reasonable basis” for your tax position, meaning a 20 percent likelihood of success is sufficient.

Filing Form 8275 has an additional advantage. If you underpay your taxes by 25 percent or more, the IRS examination period extends from three to six years. But items disclosed on Form 8275 don’t count as underpayments for the 25 percent threshold. This helps avoid crossing the 25 percent omitted income threshold, maintaining the statute of limitations period at three years.