The IRS Large Business and International Process Unit released a Practice Unit outlining steps to evaluate assessing a penalty on taxpayers who fail to include reportable transaction information with a return.
Taxpayers who participate in a reportable transaction under Reg. section 1.6011-4 are required to file a Form 8886, Reportable Transaction Disclosure Statement, with their return and with the Office of Tax Shelter Analysis (OTSA). Taxpayers who fail to provide the required information are subject to a penalty under section 6707A.
Section 6707A, enacted as part of the American Jobs Creation Act of 2004, assesses a penalty for failure to disclose a reportable transaction in the amount of 75% 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 any other reportable transaction ($10,000 for individuals). The minimum penalty for failing to disclose is $10,000 ($5,000 for an individual). Final regulations under section 6707A were issued in early 2019 to clarify the calculation of the penalty and the effect of the statute of limitations. (See our prior alert.)
Section 6707A does not provide any exception to the penalty for reasonable cause or good faith. However, the IRS may rescind the penalty, except in the instances of listed transactions, if rescission would “promote tax compliance and effective tax administration.” Congress has explicitly denied taxpayers a judicial appeal of the commissioner’s denial of a request to rescind the penalty.
The new Practice Unit includes the following process steps: Determining whether the taxpayer has participated in a reportable transaction; if so, whether the taxpayer was required to file a Form 8886, and if it was done accurately and completely; determining whether the taxpayer was required to file a Form 8886 with the OTSA, and whether it was done accurately and completely; and if the Forms 8886 where not filed or not filed accurately and completely, consider assessing the section 6707 penalty.
Taxpayers should consult their tax advisers if they believe they have participated in a reportable transaction and have failed to file a Form 8886 disclosing their participation accurately and completely. The IRS has stepped up its efforts to enforce these disclosures and will be assessing penalties for failure to file either with a return or to the OTSA.