The IRS has updated its practice unit on Partner’s Outside Basis. The overview is as follows:
As part of the American Jobs Creation Act of 2004, Congress enacted IRC 6707A along with other penalty provisions related to the disclosure of certain transactions and the failure to report them properly on tax returns. The IRS, in carrying out its authority, requires taxpayers and certain third parties to maintain and submit records pertaining to any reportable transactions.
IRC 6707A imposes a monetary penalty on taxpayers who fail to disclose any reportable transactions information which is required under IRC 6011 to be included with such return or, where applicable, on a statement sent to the IRS Office of Tax Shelter Analysis (OTSA). IRC 6707A covers two different kinds of transactions: reportable transactions, which are those the Secretary has determined as having a potential for tax avoidance or evasion; and listed transactions, which are reportable transactions that are the same as or substantially similar to those that the Secretary specifically identified as tax-avoidance transactions. Treas. Reg. 1.6011-4(b) describes five categories of reportable transactions:
– Listed transactions
– Confidential transactions
– Transactions with contractual protection
– Loss transactions
– Transactions of interest
As part of the Small Business Jobs Act of 2010, Congress enacted section 6707A for penalties assessed after December 31, 2006. Subject to maximum and minimum amounts, the penalty changed from a stated dollar amount to a percentage of the decrease in tax shown on the return as a result of a reportable transaction effective for penalties assessed after December 31, 2006. On March 26, 2019, the IRS issued final treasury regulations for section 6707A.
Generally, a taxpayer with reportable transactions who is required to file a tax return must file IRS Form 8886, Reportable Transaction.
Disclosure Statement with the tax return and, for the first filing pertaining to a particular reportable transaction, send a copy to OTSA. See Treas. Reg. 1.6011-4(e). Certain exceptions apply whereby Form 8886 need not be filed with the original return but must still be filed with OTSA. See Treas. Reg. 1.6011-4(e)(1), (2)(i) (discussing loss carrybacks, late receipt of Schedule K-1, and retroactive reportable transactions).
The penalty amount is 75 percent of the decrease in tax shown on the return as a result of the reportable transaction subject to specified maximum and minimum amounts depending on the type of transaction (listed transaction vs. other reportable transaction), and type of participant (natural person vs. entity).
For purposes of calculating the penalty, the term “decrease in tax” means the difference between the amount of tax reported on the filed return and the amount of tax that would be reported on a hypothetical return without the reportable transaction. The amount of tax on the hypothetical return considers adjustments that result mechanically in backing out the reportable transaction. It also considers any other tax that results from reportable transactions not reported on the taxpayer’s return. The term “return” includes original returns, amended returns, and applications for tentative refunds in every case where all three terms are relevant.
Section 6707A does not provide any exception to imposition of the penalty for reasonable cause or good faith. However, except for listed transactions, the IRS may rescind the penalty if rescission would promote tax compliance and effective tax administration. Congress explicitly denied taxpayers the ability to challenge in court the commissioner’s denial of a request to rescind the penalty.
Section 6707A penalty is not subject to deficiency procedures.
The statute of limitations generally follows the statute of limitations for the applicable return. However, for a listed transaction, IRC 6501(c)(10) provides additional time to assess the penalty if the taxpayer did not disclose the transaction on the return. The statute of limitations will not expire before one year after the earlier of the following:
– The date the taxpayer provides the information required per IRC 6011, or
– The date a material advisor meets the requirements of IRC 6112.
Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.