United States

Final regulations provide guidance on reportable transactions

TAX ALERT  | 

Final regulations concerning reportable transactions were released by Treasury on Monday. The final regulations provide guidance to taxpayers who participate in a reportable transaction, listed transaction or transaction of interest.

Beginning in 2004, Congress and Treasury began requiring disclosure of transactions considered to be abusive. Section 6707A was added to the Code to require disclosure of reportable transactions, listed transactions and transactions of interest. Reportable transactions are defined in the Treasury Regulations at 1.6011-4 as transactions with certain characteristics identified in the regulations. Included in reportable transaction are listed transactions and transactions of interest. Listed transactions are specific transactions identified in IRS publications as potentially abusive. Transactions of interest are similar to listed transaction in that they identify specific transactions but the IRS is still gathering information to better understand the transaction.

Section 6707A imposes a penalty on any person who fails to include information with respect to a reportable transaction on any return or statement of information with respect to a reportable transaction. Generally, reportable transactions are reported on Form 8886. The Form is required to be filed both with the tax return that reflects the tax benefits of the transaction and the form must also be filed with the IRS Office of Tax Shelter Administration (OTSA).

The penalty for failure to disclose a reportable transaction is 75 percent of the decrease in tax shown on the return as a result of transaction, subject to a minimum and a maximum penalty. The maximum penalty is $200,000 for a listed transaction ($100,000 for individuals) and $50,000 for a reportable transaction ($10,000 for individuals). The minimum penalty for failing to disclose is $10,000 ($5,000 for an individual).

Final regulations issued under section 6707A clarified two issues: calculation of the penalty and the effect of the statute of limitations.

The final regulations clarified that the amount of the penalty, 75 percent of the decrease in tax shown on the return as a result of the transaction, is determined regardless of the merits of the position. The penalty is imposed based on the amount of the decrease in tax on the return as shown, even if the taxpayer ultimately settles for a lesser amount or the position is determined to be valid. This is because the statute imposes a penalty for failure to disclose a transaction, and it is not dependent on the validity of the transaction.

The final regulations provide some relief for taxpayers for years that are closed under the statute of limitations. Periodically, the IRS will announce a listed transaction requiring taxpayers to disclose participation in the transaction. If a transaction becomes a listed transaction after the filing of a return reflecting the transaction, taxpayers must file a single disclosure with the IRS OTSA. However, if a tax year is closed under the statute of limitations for assessments (section 6501), taxpayers do not have to report those transactions to the IRS.

Penalties under section 6707A are based on failure to disclose a reportable transaction, regardless of the validity of the transaction. RSM tax professionals need to exercise due diligence in preparing a return containing a significant tax transaction as disclosure on Form 8886 may be required.

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