The Internal Revenue Service has proposed regulations changing the amount of the penalties for failing to include information required to be disclosed about reportable transactions.
The IRS said the proposed regulations are necessary to clarify the amount of the penalty under section 6707A, as amended by the Small Business Jobs Act of 2010. The proposed regulations would affect any taxpayer who fails to properly disclose participation in a reportable transaction. Section 6707A was added to the Tax Code in 2004 and amended in 2007. It imposes a penalty on a taxpayer who has a duty to disclose a reportable transaction, such as listed transactions and tax shelters, and fails to do so. It also imposes a requirement that certain taxpayers must disclose in filings with the Securities and Exchange Commission any requirement to pay a penalty under section 6707A with respect to a listed transaction, or under section 6662A or section 6662(h) with respect to an undisclosed reportable transaction. Failure to make that required disclosure to the SEC subjects a taxpayer to another penalty under section 6707A.
Section 6707A was amended again in 2010 by the Small Business Jobs Act of 2010, which changed the amount of the penalty from a stated dollar amount to a percentage, with both maximum and minimum dollar amounts. Before the Jobs Act was enacted, the penalty was $10,000 in the case of a “natural person” ($50,000 in any other case) and, in the case of a listed transaction, $100,000 in the case of a natural person ($200,000 in any other case). In some cases, the IRS noted, this structure resulted in penalties that were potentially disproportionate to the tax benefit derived from the transaction.
The Jobs Act amended section 6707A(b) to make the penalty 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 ($5,000 in the case of a natural person). The maximum penalty amount is $200,000 ($100,000 in the case of a natural person) for failure to disclose a listed transaction, or $50,000 ($10,000 in the case of a natural person) for failure to disclose any other reportable transaction. The 2010 amendment specifying the amount of the penalty applies to penalties assessed after Dec. 31, 2006.
On Sept. 7, 2011, final regulations were published in the Federal Register, but the final regulations in TD 9550 did not provide guidance on the amount of the penalty as amended by the Jobs Act beyond reciting the language of section 6707A because the notice of proposed rulemaking on which those final regulations were based predated the Jobs Act. The proposed regulations in the document posted last Thursday by the IRS provide guidance on the amount of the penalty under section 6707A, as amended by the Jobs Act.
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