Forms 8275, 8275-R & 8886

The IRS regulations provide that a taxpayer must disclose certain transactions known as "listed transactions" by filing a disclosure statement (Form 8886) with its tax return. A "listed transaction" is a transaction that is the same as or substantially similar to one that the IRS has determined to be a tax avoidance transaction and identified by IRS notice or other form of published guidance. The parties who participate in listed transactions may be required to disclose the transaction as required by the regulations, register the transaction with the IRS, or maintain lists of investors in the transactions and provide the list to the IRS on request.
 

Listed Transactions

The IRS had identified the following transactions involving employee benefit plans as listed transactions:

• 401(k) Accelerated Deductions
• S Corporation ESOP Abuse of Delayed Effective Date for Section 409(p)
• Collectively Bargained Welfare Benefit Funds under Section 419A(f)(5)
• Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
• Abusive Roth IRA Transactions
• S Corporation ESOP Abuses: Certain Business Structures Held to Violate Code Section 409(p)
• Deductions for Excess Life Insurance in a Section 412(i) or Other Defined Benefit Plan

More Listed Transactions
More Listed Transactions and a couple California Listed Transactions


Notice 2005-11 New Penalty Section 6707A and Rescission Authority

The Service will impose a penalty under section 6707A with respect to each failure to disclose a reportable transaction within the time and in the form and manner provided by section 6011 and the regulations thereunder. Accordingly, a taxpayer will be subject to a penalty under section 6707A for: (1) the failure to attach a reportable transaction disclosure statement to an original or amended return; or (2) the failure to provide a copy of a disclosure statement to OTSA, if required. A taxpayer that fails to attach a reportable transaction disclosure statement to an original or amended return and fails to provide a copy of a required disclosure statement to OTSA will be subject to a single penalty under section 6707A. The following examples illustrate this provision:

Example 1: Taxpayer T was required to attach a Form 8886 "Reportable Transaction Disclosure Statement" to its original return for the 2005 taxable year and to send a copy of the Form 8886 to OTSA at the time it filed its original return. T failed to attach the Form 8886 to its return and failed to send a copy of the Form 8886 to OTSA. Taxpayer T is subject to a penalty under section 6707A for a failure to disclose because Taxpayer T failed to comply with both of the disclosure requirements. A penalty under section 6707A also would apply if T had failed to comply with either of the two requirements.

Example 2: Same as Example 1, except that T subsequently filed an amended return for 2005 that reflects Taxpayer T’s participation in the reportable transaction. Taxpayer T failed to attach a Form 8886 to the amended return as required by section 1.6011-4(e)(1). Accordingly, Taxpayer T is subject to an additional penalty under section 6707A for failing to disclose a reportable transaction.

The penalty under section 6707A applies to each failure to provide a disclosure statement that is required to be attached to an original or amended return filed after October 22, 2004 (with a copy sent to OTSA, if required), regardless of whether the original return was due on or before October 22, 2004. Under section 1.6011-4(e)(1), a reportable transaction disclosure statement is due upon the filing of a return or amended return reflecting a taxpayer’s participation in a reportable transaction. Accordingly, a penalty under section 6707A will not be imposed until a taxpayer fails to provide the required disclosure statement with an original or amended return, or fails to provide a copy to OTSA, if applicable, even if the return is filed after the due date. In addition, a penalty under section 6707A will not be imposed if the disclosure statement is attached to a return that is filed after the due date for filing the return unless the taxpayer fails to provide a copy of the disclosure statement to OTSA, if applicable.

Reportable Transaction Disclosure Statement

Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. The following are reportable transactions.

• Any transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
• Any transaction offered under conditions of confidentiality for which you paid an advisor a minimum fee.
• Any transaction for which you have contractual protection against disallowance of the tax benefits.
• Any transaction resulting in a loss of at least $2 million in any single tax year or $4 million in any combination of tax years. (At least $50,000 for a single tax year if the loss arose from a foreign currency transaction defined in section 988(c)(1), whether or not the loss flows through from an S corporation or partnership.)
• Any transaction resulting in a book-tax difference of more than $10 million on a gross basis.
• Any transaction resulting in a tax credit of more than $250,000, if you held the asset generating the credit for 45 days or less.

Form 8886 Instructions

Protective disclosure.   You may indicate that you are filing on a protective basis by checking this box (under the option provided in Regulations section 1.6011-4(f)).

When and How To File

Attach Form 8886 to your income tax return or information return (including a partnership, S corporation or trust return), including amended returns, for each tax year in which you participated in a reportable transaction. If a reportable transaction results in a loss or credit carried back to a prior tax year, attach Form 8886 to an application for tentative refund (Form 1045 or 1139) or amended return for the carryback years. If you filed a return or amended return that reflects the tax consequences or tax strategy of a transaction that later becomes a listed transaction, attach Form 8886 to the first tax return you file after the date the transaction became a listed transaction.

Also file separately. If this is an initial year filing of Form 8886, send an exact copy of the form to the Office of Tax Shelter Analysis (OTSA) at the following address when you file the form with your tax return:

Internal Revenue Service
OTSA Mail Stop 4915
1973 North Rulon White Blvd.
Ogden, Utah 84404

 

Also, potentially conflicting requirement: Form 8886 should be attached for each tax year in which the person or entity participated in a reportable transaction. Also, for only the first time a reportable transaction is disclosed, a copy of the Form 8886 should be sent to:

Internal Revenue Service
LM:PFTG:OTSA
Large and Mid-Size Business Division
1111 Constitution Ave., NW
Washington, DC 20224

Form 8275 "Disclosure Statement" Instructions

Who Should File

Form 8275 is used by taxpayers and income tax return preparers to disclose items or positions, except those taken contrary to a regulation, that are not otherwise adequately disclosed on a tax return to avoid certain penalties. The form is filed to avoid the portions of the accuracy-related penalty due to disregard of rules or to a substantial understatement of income tax for non-tax shelter items if the return position has a reasonable basis. It can also be used for disclosures relating to preparer penalties for understatements due to unrealistic positions or disregard of rules.

Form 8275 is filed by individuals, corporations, pass-through entities, and income tax return preparers. If you are disclosing a position taken contrary to a regulation, use Form 8275-R, Regulation Disclosure Statement, instead of Form 8275.

For items attributable to a pass-through entity, disclosure should be made on the tax return of the entity. If the entity does not make the disclosure, the partner (or shareholder, etc.) may make adequate disclosure of these items.

Form 8275-R "Regulation Disclosure Statement"  Instructions

Who Should File

Form 8275-R is used by taxpayers and income tax preparers to disclose positions taken on a tax return that are contrary to Treasury regulations. The form is filed to avoid the portions of the accuracy-related penalty due to disregard of regulations or to a substantial understatement of income tax for non-tax shelter items if the return position has a reasonable basis. It can also be used for disclosures relating to the preparer penalties for income tax understatements due to positions taken contrary to regulations.

Form 8275-R is filed by individuals, corporations, pass-through entities, and income tax return preparers.

For items attributable to a pass-through entity, disclosure should be made on the tax return of the entity. If the entity does not make the disclosure, the partner (or shareholder, etc.) may make adequate disclosure of these items.

Colin M. Cody, CPA, CMA
TraderStatus.com LLC
6004 Main Street
Trumbull, Connecticut 06611-2400

(203) 268-7000