The cry that the program being promoted to the client is “different” from those that have either lost in court or been identified as a listed transaction is one that most advisers have heard.  But in the case of Interior Glass System, Inc. v. United States[1], CA9, No. 17-15713, IRC §6707A’s disclosure rule is one thing that is like horseshoes and hand grenades—close counts and transactions that are close to listed ones must be disclosed.

IRC §6707A provides for penalties to be imposed on a taxpayer who fails to disclose a reportable transaction, with additional penalties imposed if the transaction is a listed transaction. 

Final regulations have been issued by the IRS on the penalty found at IRC §6707A for failure to disclose a reportable transaction (TD 9853).  These regulations clarify the application of these rules due to changes made in the Small Business Jobs Act of 2010.  That Act modified the calculation of the penalty, making it somewhat less draconian than the fixed dollar penalties found in the original provision.

IRC §6707A imposes penalties for failing to report certain transactions that are either treated as reportable transactions as defined by Reg. §1.6011-4 or are treated as listed transactions due to being identified by IRS as a tax avoidance transaction for purposes of IRC §6011

Taxpayers who participate in a listed transaction or one similar to a described listed transaction and fail to disclose such participation face a penalty under IRC §6707A regardless of whether or not the transaction ends up resulting in a true understatement of tax.  And “similar” is interpreted broadly, as the taxpayer in the case of Vee’s Marketing, Inc. v. United States, CA7, Case No. 15-2441 discovered.

The penalty under §6707A for failure to disclose such a transaction is 75% of the claimed reduction in tax shown on the return (regardless of whether or not that deduction is ultimately found justified or not).  A minimum penalty of $5,000 for a natural person or $10,000 for any other taxpayer is triggered regardless of the level of savings, with the penalty similarly capped at $100,000 for a natural person and $200,000 for other taxpayers regardless of the claimed level of tax reduction.  The minimums and maximums are set at a lower figure for transactions that are “reportable transactions” rather than listed transactions (reportable transactions are defined by statute, not by direct IRS identification).

The IRS has issued proposed regulations (REG-103033-11) that would provide guidance on the application of the failure to disclose a reportable transaction penalty found in IRC §6707A. 

Generally a taxpayer who participates in a reportable transaction must disclose such participation on any return affected by the transaction in question under IRC §6011.  A taxpayer who fails to make such a required disclosure (generally on a Form 8886) is subject to a penalty.