What is a Form 8886 Reportable Transaction to the IRS?

What is a Form 8886 Reportable Transaction

Form 8886 Reportable Transactions: When it comes to tax avoidance, as long as the US Taxpayer is not intentionally seeking to illegally evade tax, then seeking to legally avoid or minimize tax is not illegal. Stated another way — riding the line is not illegal unless a Taxpayer crosses the line. The Internal Revenue Service may disagree with your tax position, but that does not mean the Taxpayer committed a crime or did anything illegal. On one end of the spectrum, the IRS wants to collect as much tax as possible — and on the other end of the spectrum, Taxpayers want to minimize or eliminate as much tax as possible. But, when a Taxpayer engages in a reportable transaction — it can be concerning. Let’s dive into the basics of the reportable transaction rules — such as listed transactions — and how Taxpayer’s put themselves at risk.

Form 8886

When a taxpayer participates in certain transactions in which the IRS has deemed the type of transaction prone to illegal tax avoidance — it is  is referred to as a Reportable Transaction — and The taxpayer may have to file a form 8886 to report the transaction.

What is the Purpose of the 8886 Form?

• • • Use Form 8886 to disclose information for each reportable transaction in which you participated. See Participation in a Reportable Transaction, later, to determine if you participated in a reportable transaction.

    • For more information on the disclosure rules, see Regulations section 1.6011-4. Generally, you must file a separate Form 8886 for each reportable transaction. However, you may report more than one transaction on one form if the transactions are the same or substantially similar. See the

Does this Mean the Tax Benefit is disallowed?

No, not at all. In fact, on the instructions perform 8886 (used to disclose certain listed transactions), the IRS provides the following:

• • • “The fact that a transaction must be reported on this form does not mean the tax benefits from the transaction will be disallowed.”

Thus, just because a transaction may be substantially similar to wait to a transaction type generally frowned upon by the IRS — does not mean this specific transaction will be disallowed.

Types of Reportable Transactions

There are different types of reportable transactions that fall into different categories. Let’s breakdown some of the different categories of reportable transactions:

Listed Transaction

As provided by the IRS:

• • • A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by notice, regulation, or other form of published guidance as a listed transaction.

      For existing guidance, see Notice 2009-59.

Notice 2009-59

• • • This notice updates the list of transactions that have been determined by the Internal Revenue Service to be “listed transactions” for purposes of § 1.6011- 4(b)(2) of the Income Tax Regulations and §§ 6111, 6112, 6662A, 6707, 6707A, and 6708 of the Internal Revenue Code. This notice restates the list of “listed transactions” in Notice 2004-67, 2004-2 C.B. 600, and updates the list by adding transactions identified as “listed transactions” in notices and other guidance released after September 24, 2004.

What does This Mean?

There are certain transactions in which the Internal Revenue Service has determined that these types of transactions in general are a type of potentially illegal tax avoidance. If a Taxpayer participates in the type of transaction that is similar to one of these transactions already identified by the IRS, it is considered a Listed Transaction — and may require proactive disclosure by the taxpayer

The IRS published certain listed transactions that help taxpayers stay on the straight and narrow, and the list is updated. One common situation we have come across is the syndicated conservation easement transaction.

Confidential Transactions

Another common type of reportable transaction on form 8886 is a confidential transaction.

As provided by the IRS:

• • • A transaction is considered to be offered under conditions of confidentiality if the advisor places a limitation on your disclosure of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of the advisor’s tax strategies.

    • The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. See Regulations section 1.6011-4(b)(3) for more information

What does This Mean?

Put it this way, if the taxpayer gets into a situation where they pay a significant amount of money in order to obtain a confidential tax benefit, and the taxpayer is prevented by agreement with the promoter or other person to identify the tax position on the tax returns, then that is considered a reportable confidential transaction (and will almost never be a good investment opportunity)

Transactions with Contractual Protection

Another type of reportable transaction is referred to as a transactions with contractual protection. In other words, if the taxpayer has the opportunity to a full or partial refund if the tax benefits are not sustained, then this type of transaction is considered to be a transaction which is reportable on form 8886.

This one can be a bit nebulous, so the the IRS clarifies as follows:

• • • You have participated in a transaction with contractual protection if your tax return reflects a tax benefit from the transaction and, as described above, you have the right to a full or partial refund of fees or the fees are contingent.

    • All facts and circumstances relating to the transaction will be considered when determining whether a fee is refundable or contingent, including the right to reimbursements of amounts that the parties to the transaction have not designated as fees or any agreement to provide services without compensation.

    • If a pass-through entity (partnership, S corporation, or trust) has the right to a full or partial refund of fees or has a contingent fee arrangement, but the partner, shareholder, or beneficiary individually does not, then the pass-through entity (but not the partner, shareholder, or beneficiary) has participated in the transaction with contractual protection.

Loss Transactions

While losses that a taxpayer suffers maybe deductible or expensed on a tax return depending on the facts and circumstances, along with the category of income  — reportable loss transactions are a bit different and refer to section 165.

Section 165 Losses

• • • You have participated in a loss transaction if your tax return reflects a section 165 loss that equals or exceeds the applicable threshold amount. If you are a partner, shareholder, or beneficiary of a pass-through entity (partnership, S corporation, or trust), you have participated in a loss transaction if your tax return reflects a section 165 loss allocable to you from the pass-through entity (disregarding netting at the entity level) that equals or exceeds the applicable threshold amount.

    • For this purpose, a tax return is deemed to reflect the full amount of the section 165 loss allocable to the taxpayer, regardless of whether all or part of the loss enters in the computation of a net operating loss under section 172 or net capital loss under section 1212 that the taxpayer may carry back or carry over to another year.

Examples of Section 165 Losses

• • • For individuals, at least $2 million in any single tax year or $4 million in any combination of tax years. (At least $50,000 for a single tax year if the loss arose from a section 988 transaction defined in section 988(c)(1) (relating to foreign currency transactions), whether or not the loss flows through from an S corporation or partnership). • For corporations (excluding S corporations), at least $10 million in any single tax year or $20 million in any combination of tax years.

    • For partnerships with only corporations (excluding S corporations) as partners (looking through any partners that are also partnerships), at least $10 million in any single tax year or $20 million in any combination of tax years, whether or not any losses flow through to one or more partners.

    • For all other partnerships and S corporations, at least $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more partners or shareholders.

    • For trusts, at least $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more beneficiaries. (At least $50,000 for a single tax year if the loss arose from a section 988 transaction defined in section 988(c)(1) (relating to foreign currency transactions), whether or not the loss flows through from an S corporation or partnership).

Is the Transaction Reportable?

If you are unsure whether or not you have a reportable transaction you may request the IRS to issue you a ruling on the specific transaction and whether it is reportable on form 8886.

• • • You may request a ruling from the IRS to determine whether a transaction must be disclosed. The request for a ruling must be submitted to the IRS by the date Form 8886 would otherwise be required to be filed. 

    • The potential obligation of the taxpayer to disclose the transaction will not be suspended during the period that the ruling request is pending.

Reportable Transactions are Complex Undertakings

In conclusion, reportable transactions and the filing of form 8886 is a very complicated undertaking. Taxpayers should be careful to make sure that you they are in compliance for reportable transactions in order to avoid significant scrutiny by the Internal Revenue Service along with fines and penalties.

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