IRS finalizes regulations for reportable transaction penalties

The Internal Revenue Service has issued final regulations offering guidance on the penalty for failing to include information that’s supposed to be disclosed about reportable transactions and how to calculate the penalty amount.

A man walks past the IRS headquarters in Washington, D.C.
The IRS headquarters in Washington, D.C.

The regulations clarify the amount of the penalty under section 6707A of the tax code, which was amended by the Small Business Jobs Act of 2010. “The final regulations will affect any taxpayer who fails to properly disclose participation in a reportable transaction,” said the IRS.

Section 6707A imposes a penalty for failing to disclose a reportable transaction, especially for companies that fail to disclose such transactions in their filings with the Securities and Exchange Commission.

The Small Business Jobs Act changed the amount of the penalty from a stated dollar amount to a percentage of the decrease in tax shown on the return as a result of a reportable transaction. The law also provided some maximum and minimum penalty amounts. Before the law was enacted in 2010, the penalty was $10,000 for individual taxpayers ($50,000 for other kinds of taxpayers) and, in the case of a listed transaction, it was $100,000 in the case of an individual (or $200,000 for other entities). However, in some cases, the IRS noted, this structure resulted in penalties that were potentially disproportionate to the tax benefit derived from the transaction.

The Small Business Jobs Act amended section 6707A(b) to make the penalty equivalent to 75 percent of the decrease in tax shown on the return as a result of a reportable transaction, with a minimum penalty amount of $10,000 (or $5,000 in the case of an individual). The maximum penalty amount is $200,000 ($100,000 in the case of an individual) for failure to disclose a listed transaction, or $50,000 ($10,000 in the case of an individual) for failure to disclose any other reportable transaction. The Jobs Act amendment applies to penalties assessed after Dec. 31, 2006. The transactions are supposed to be reported on Form 8886.

The IRS received only one comment on the proposed regulations, containing two suggestions. The commenter suggested the IRS make some changes in the definition of “decrease in tax,” which the IRS decided not to do. The same commenter also suggested an additional factor for the IRS to consider when determining whether to rescind a section 6707A penalty, which was to add the filing of a timely amended return that removes the tax benefits claimed with respect to the reportable transaction to the list of factors. But the IRS decided not to adopt that suggestion either.

The final regulations also give some examples of how to apply the rules in the case of different types of taxpayers and reportable transactions, and how the penalty amounts would be calculated for failing to report them.

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