Tax Shelter Penalties for IRS Reportable Transactions

Tax Shelter Penalties for IRS Reportable Transactions

Tax Shelter Penalties for IRS Reportable Transactions

In general, a Tax Shelter is the type of tax planning mechanism that the IRS frowns upon because of the concern that the planning tool is not kosher. When it comes to international tax law, this tends to include issues involving foreign trusts and syndicated conservation easements abroad. There are many different types of tax shelters, and each year the US Government tries to uncover and identify new types of tax shelters.  When the tax shelter is used for improper purposes, then it can be considered an abusive or illegal tax shelter — which can lead to additional disclosure requirements, fines, and penalties. There are reporting requirements for certain types of transactions on Form 8886 that Taxpayers should be aware of for transactions that can be considered as reportable, listed, or confidential. 

As provided by the IRS instructions:

Form 8886 Disclosure Statement 

      • If you are filing more than one Form 8886 with your tax return, sequentially number each Form 8886 and enter the statement number for this Form 8886

      • Enter the form number of the tax return to which this form is attached or related 

      • Enter the year of the tax return identified above

        • Is this Form 8886 being filed with an amended tax return?

      • Initial year filer Protective disclosure

        • 1a Name of reportable transaction

        • 1 b Initial year participated in transaction 1c Reportable transaction or tax shelter registration number. See instructions.

      • 2 Identify the type of reportable transaction. Check all boxes that apply. See instructions. a Listed b Confidential c Contractual protection d Loss e Transaction of interest

      • 3 If you checked box 2a or 2e, enter the published guidance number for the listed transaction or transaction of interest

      • 4 Enter the number of “same as or substantially similar” transactions reported on this form .

      • 5 If you participated in this reportable transaction through a partnership, S corporation, trust, and foreign entity, check the applicable boxes and provide the information below for the entity(ies). See instructions. (Attach additional sheets, if necessary.)

      • a Type of entity

      • Partnership S corporation Trust Foreign Partnership S corporation Trust Foreign

      • b Name 

      • c Employer identification number (EIN), if known. 

      • d Date Schedule K-1 received from entity (enter “none” if Schedule K-1 not received).

      • 6 Enter below the name and address of each individual or entity to whom you paid a fee with regard to the transaction if that individual or entity promoted, solicited, or recommended your participation in the transaction, or provided tax advice related to the transaction. (Attach additional sheets, if necessary.) a Name Identifying number (if known) Fees paid $ Number, street, and room or suite no. City or town State ZIP code b Name Identifying number (if known) Fees paid $ Number, street, and room or suite no. City or town State ZIP code For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 34654G Form 8886 (Rev. 12-2019) Form 8886 (Rev. 12-2019) Page 2

      • 7 Facts

        • a Identify the type of tax benefit generated by the transaction. Check all the boxes that apply. See instructions. Deductions Exclusions from gross income Absence of adjustments to basis Tax credits Capital loss Nonrecognition of gain Deferral Ordinary loss Adjustments to basis

        • b Enter the total dollar amount of your tax benefits identified in 7a. 

        • c Enter the anticipated number of years the transaction provides the tax benefits stated in 7b.

        • d Enter your total investment or basis in the transaction. See instructions

        • e Further describe the amount and nature of the expected tax treatment and expected tax benefits generated by the transaction for all affected years. Include facts of each step of the transaction that relate to the expected tax benefits including the amount and nature of your investment. Include in your description your participation in the transaction and all related transactions regardless of the year in which they were entered into. Also, include a description of any tax result protection with respect to the transaction.

      • 8 Identify all individuals and entities involved in the transaction that are tax-exempt, foreign, or related. Check the appropriate box(es). See instructions. Include their name(s), identifying number(s), address(es), and a brief description of their involvement. For each foreign entity, identify its country of incorporation or existence. For each individual or related entity, explain how the individual or entity is related. Attach additional sheets, if necessary.

      • Type of individual or entity: Tax-exempt Foreign Related Name Identifying number Address Description

        • b Type of individual or entity: Tax-exempt Foreign

General Instructions Purpose of 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 definition of substantially similar below. The fact that a transaction must be reported on this form does not mean the tax benefits from the transaction will be disallowed.

Prohibited Tax Shelter Transactions.

      • Generally, the term “prohibited tax shelter transaction” means listed transactions, transactions with contractual protection, or confidential transactions. See the definitions of these categories below. There may be additional disclosure requirements for tax-exempt entities with respect to these types of transactions.

      • If you are a tax-exempt entity and you are a party to a prohibited tax shelter transaction, you may be required to file Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, in addition to filing Form 8886. For more information, see the Instructions for Form 8886-T.

Participation in a Reportable Transaction

A reportable transaction is a transaction described in one or more of the following categories.

Listed Transactions

      • 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, 2009-31 I.R.B. 170, available at IRS.gov/pub/irs-irbs/irb09-31.pdf.

      • For updates to this list, go to the IRS web page at IRS.gov/businesses/ corporations/abusive-tax-shelters-andtransactions. The listed transactions will also be periodically updated in future issues of the Internal Revenue Bulletin.

      • You can find a notice or ruling in the Internal Revenue Bulletin at IRS.gov/pub/irs-irbs/irbXX-YY.pdf, where XX is the two-digit year and YY is the two-digit bulletin number.

      • For example, you can find Notice 2009-59, 2009-31 I.R.B. 170, at IRS.gov/pub/irsirbs/irb09-31.pdf.

You have participated in a listed transaction if any of the following applies.

      • Your tax return reflects tax consequences or a tax strategy described in published guidance that lists the transaction.

      • You know or have reason to know that tax benefits reflected on your tax return are derived directly or indirectly from such tax consequences or tax strategy.

      • You are in a type or class of individuals or entities that published guidance treats as participants in a listed transaction.

Penalties

      • There is a monetary penalty under section 6707A for the failure to include on any return or statement any information required to be disclosed under section 6011 with respect to a reportable transaction. Generally, the penalty for failure to include information with respect to a reportable transaction is 75% of the reduction in the tax reported on the income tax return as a result of participation in the transaction or that would result if the transaction were respected for federal tax purposes, but not less than $5,000 in the case of an individual and $10,000 in any other case.

      • The annual maximum penalty for failure to disclose a reportable transaction, other than a listed transaction, cannot exceed $10,000 in the case of an individual, and $50,000 in any other case. The maximum annual penalty for failure to include information with respect to a listed transaction is $100,000 in the case of an individual and $200,000 in any other case. This penalty is in addition to any other penalty that may be imposed. For information, see section 6707A and Regs. 301.6707-1. If you have a reportable transaction understatement, an accuracy-related penalty may be imposed under section 6662A. This penalty applies to the amount of the understatement that is attributable to any listed transaction and any reportable transaction (other than a listed transaction) with a significant tax avoidance purpose.

      • The penalty increases for transactions that are not disclosed on Form 8886 in accordance with these instructions. If the transaction is not disclosed and a reportable transaction understatement exists, you may not have a reasonable cause and good faith defense under section 6664(d) with respect to the accuracy-related penalty under section 6662A. For more information, see section 6662A and Notice 2005-12, 2005-7 I.R.B. 494, available at IRS.gov/pub/irs-irbs/irb05-07.pdf. A penalty under section 6707A is assessed for each failure by any individual or entity required to file a Form 8886 if the individual or entity (a) fails to attach Form 8886 to the appropriate original, amended return, or application for tentative refund; (b) fails to file the form with OTSA, if required; or (c) files a form that fails to include all the information required (or includes incorrect information).

      • The Form 8886 must be completed in its entirety with all required attachments to be considered complete. Do not enter “Information provided upon request” or “Details available upon request,” or any similar statement in the space provided. Inclusion of any such statements subjects you to penalty under sections 6707A and 6662A. If you are required to pay a penalty under section 6707A or section 6662A, you may be required to disclose them on reports filed with the Securities and Exchange Commission. If you do not disclose these penalties, you may incur additional penalties under section 6707A(e). 

Previously Undisclosed Listed Transactions

      • If you are required to disclose a listed transaction and fail to do so within the time and manner prescribed under section 6011 and the related regulations, then under section 6501(c) (10) the period to assess any tax with respect to the listed transaction will be extended beyond the normal assessment period until 1 year after the earlier of either: 

        • The date you disclose the transaction by filing Form 8886 in the manner prescribed in Rev. Proc. 2005-26, 2005-17 I.R.B. 965, available at IRS.gov/pub/irs-irbs/irb05-17.pdf (or subsequently published guidance); or •

        • The date that a material advisor provides the information required under section 6112 in response to a request by the IRS under section 6112. Section 6501(c)(10) is effective for tax years with respect to which the limitations period on assessment did not expire prior to October 22, 2004.

        • For more information, see Rev. Proc. 2005-26. If you are filing Form 8886 to disclose a previously undisclosed listed transaction for purposes of section 6501(c)(10), submit the form and a cover letter to the Internal Revenue Service Center where your original tax return was filed.

        • Write across the top of page 1 of each Form 8886 the following statement: “Section 6501(c)(10) Disclosure” followed by the tax year and tax return to which the disclosure statement applies. For example, if the Form 8886 relates to your Form 1040 for the 2002 tax year, you must include the following statement: “Section 6501(c)(10) Disclosure; 2002 Form 1040” on the form.

        • The cover letter must identify the tax return to which the disclosure statement relates and include the following statement signed under penalties of perjury by the taxpayer and, if applicable, the paid preparer of Form 8886: “Under penalties of perjury, I declare that I have examined this reportable transaction disclosure statement and, to the best of my knowledge and belief, this reportable transaction disclosure statement is true, correct, and complete. Declaration of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.” Separate Forms 8886 and separate cover letters must be submitted for each tax year for which you participated in the undisclosed listed transaction. You must also submit a copy of the form and cover letter simultaneously to OTSA at the OTSA address under When and How To File, earlier. See Rev. Proc. 2005-26 for additional guidance

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