IRS changes procedure for reporting tax shelters

The Internal Revenue Service is temporarily allowing taxpayers who engage in so-called “reportable transactions,” typically tax shelters, to fax the Form 8886 for initially disclosing them to the IRS instead of mailing in the form.

Until further notice, the IRS said Thursday it’s permitting taxpayers and tax professionals to fax a copy of Form 8886, the Reportable Transaction Disclosure Statement, to its Office of Tax Shelter Analysis, at (844) 253-2553 for the initial-year filing of the form with that office. However, taxpayers will still need to submit two copies of the Form 8886 to the IRS. Taxpayers will continue to file Form 8886 with their tax return (including extensions), but instead of mailing the paper copy of the initial year filing of Form 8886 to the IRS OTSA Unit in Ogden, Utah, taxpayers can now fax it to the number above.

The IRS is still in the process of catching up with millions of pieces of unopened mail that arrived in its offices during the outbreak of the novel coronavirus pandemic. Most of the IRS workforce began working remotely in the midst of tax season, although eventually more employees returned to the offices to sort through the mail that was being stored in trailers outside of IRS facilities. During the pandemic, the IRS has begun offering the ability to fax in certain forms instead of mailing them. In April, the IRS temporarily closed down its Ogden, Utah, facilities, but employees began returning about a month later.

Andrew Harrer/Bloomberg

Any taxpayer, including an individual, trust, estate, partnership, S corporation, C corporation or other type of corporation, who participates in a reportable transaction and is required to file a federal tax return or information return, has to file Form 8886.

Reportable transactions include “listed transactions” that are similar to the types of tax avoidance schemes that the IRS watches out for on its list of recognized abusive and listed transactions.

Reportable transactions can also include “confidential transactions” offered to a taxpayer under conditions of confidentiality and for which the taxpayer has paid a minimum advisor fee, along with “contractual protection” transactions that are offered with the right to a full or partial refund of the fees paid to an advisor if the IRS doesn’t allow the tax benefit of the transaction.

They also include “loss transactions,” as outlined by the IRS in its description of loss transactions, as well as “transactions of interest,” which the IRS and the Treasury Department believe have the potential for tax avoidance or evasion but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. For more information, see the instructions to Form 8886 for a definition of “participation in a reportable transaction” to determine if the transaction requires disclosure.