The Internal Revenue Service has a comprehensive strategy in place to combat abusive tax shelters and transactions. This strategy includes guidance on abusive transactions, regulations governing tax shelters, a hotline for taxpayers to use to report abusive technical transactions, and enforcement activity against abusive tax shelter promoters and investors.
There are substantial penalties that the IRS can impose for failure to disclose “reportable transactions,” that is, transactions identified by the IRS as having a potential for tax avoidance or evasion. Reportable transactions are divided into five categories, discussed below.
The penalty for failure to disclose a reportable transaction is 75% of the decrease in tax as a result of the transaction. The maximum penalty for each such failure to disclose a “listed transaction” on the appropriate tax return is $100,000 for an individual and $200,000 for other taxpayers. The maximum penalty for failure to disclose any other reportable transaction is $10,000 for an individual and $50,000 for other taxpayers. The minimum penalties are $5,000 for an individual and $10,000 for other taxpayers. [IRC Sec 6707A(b)]
In addition to IRS penalties, certain states have adopted similar disclosure requirements and large penalties for failure to comply.
For a complete list of reportable transactions, please visit www.irs.gov/Businesses/
Five Categories of Reportable Transactions:
Listed Transactions – To date, the IRS has identified 36 listed transactions which are summarized below. Each transaction has a link to the IRS Notice or other ruling naming the transaction as a “listed transaction” and providing details about it.
Transactions of Interest – To date, the IRS has identified six transactions of interest which are also summarized below and include a link to the applicable IRS Notice.
Confidential Transactions – Transactions that are offered under conditions of confidentiality limiting what you can disclose about the tax treatment or structure of the transaction and for which you or a related party paid an advisor a minimum fee. The minimum fee for a transaction is $250,000 for corporations (and partnerships or trusts in which all of the owners or beneficiaries are corporations) and $50,000 for all other taxpayers.
Transactions with Contractual Protection – Transactions for which you, or a related party, have the right to a full or partial refund of fees if all or part of the intended tax consequences are not sustained. These also include transactions for which fees are contingent on your realization of tax benefits from the transaction.
Loss Transactions – Transactions resulting in losses under IRC Sec. 165 for individuals, partnerships, S corporations and trusts that are at least $2 million in any single tax year or $4 million in any combination of tax years. The thresholds for C corporations (and partnerships with only C corporations as partners) are $10 million in any single tax year or $20 million in any combination of tax years. In addition, the threshold for individuals or trusts with losses arising from certain foreign currency transactions is $50,000 in any single taxable year.