Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

TAX SHELTER REPORTING - FEAR TAKES ON GREED

December 02, 2004

The American Jobs Creation Act signed into law in October adds severe penalties to the tax law for failure to properly report transactions with tax shelter potential. These penalties respond to the lucrative and widely-marketed tax shelters generated by major accounting and law firms beginning in the 1990s.

Legislation against tax abuses is difficult to draft narrowly, and Congress ends up firing into the crowd to stop the tax abusers. This can be nerveracking to the rest of the crowd.

The part of the new legislation that frays our nerves is the severe penalties for failing to properly disclose "reportable" transactions. These rules are designed to force tax shelter-users to let the IRS know about dicey tax shelters by imposing severe penalties if they don't disclose them properly. These penalties apply strictly for failure to disclose - even if the tax benefits of the transaction are upheld, the failure to disclose is subject to penalties.

"REPORTABLE" AND "LISTED" TRANSACTIONS

The new tax law disclosure penalties have two levels. Failure to properly disclose a "reportable" transaction carries a $10,000 fine on an individual return and a $50,000 fine on a corporation, partnership or trust return. This fine can be waived under some some circumstances.

Failure to properly disclose a "listed" transaction carries a $100,000 fine for individuals and a $200,000 fine for other entities. Worse, this fine may not be waived. "Listed" transactions are those that the IRS has identified by published guidance as such - and transactions "substantially similar" to identified transactions.

Most taxpayers won't run into "reportable" or "listed" transactions in their day-to-day financial life, fortunately. The severity of the penalties makes it important for taxpayers to be aware of them.

CONTINGENT FEE TRANSACTIONS

For business taxpayers, contingent fee transactions are the "reportable" transactions most likely to be encountered. These will include any transaction where the fee depends on tax savings or deductions achieved. Common examples include depreciation studies (e.g., building cost component studies) and research credit studies.

PARTNERS: BEWARE FORM 8886

Individuals are most likely to encounter listed or reportable transactions vicariously through partnership investments. Many hedge funds and widely-held partnerships are involved in transactions they feel might be "similar" to listed transactions, so they protect themselves from the $200,000 fine by disclosing them.

Partners in such funds are also required to comply with the disclosure requirements. Partnerships will let partners know about these requirements by providing them with Forms 8886 at the same time they provide their year-end K-1s.

It is crucial for partners to supply their tax preparers with all tax information from their partnerships - including any Forms 8886. Partners can't avoid the $100,000 disclosure penalty by simply not telling their preparers about their Forms 8886.

The Tax Update is beginning a series on various listed and reportable transactions. Why? With $100,000 - $200,000 non-waivable penalties, inquiring minds might want to know what these things are. Meanwhile, you can find the current collection of "listed transactions" in Notice 2004-67. There are 30 of them, so we won't run short of material.

 • Listed Transactions       Bookmark: del.icio.us • Digg • reddit