IRS guidance on reportable transaction disclosure penalties.

In Notice 2005-11, the IRS announced that it will issue regulations under Sec. 6707A, that will apply to returns and statements due after Oct. 22, 2004. The notice also provides interim rules on the imposition and rescission of Sec. 6707A penalties.

New Disclosure Penalties

The American Jobs Creation Act of 2004 (AJCA), Section 811, added Sec. 6707A to provide a monetary penalty for the failure to include on any return or statement information required to be disclosed on a reportable transaction under Sec. 6011. Prior to the AJCA, there was no such penalty for failure to disclose a reportable transaction.

Sec. 6707A(b) provides that the penalty for failing to include information on a reportable transaction (other than a listed transaction) is $10,000 for a natural person and $50,000 in any other case. The penalty for failing to include information on a listed transaction is $100,000 for a natural person, and $200,000 in any other case.

Sec. 6707A(e) provides that a person required to file periodic reports under Sec. 13 or 15(d) of the Securities Exchange Act of 1934, or required to be consolidated with another person for purposes of those reports, must disclose the requirement to pay the following penalties in reports to the Securities and Exchange Commission (SEC) for periods specified by the IRS: the (1) Sec. 6707A penalty for failure to disclose a listed transaction; (2) 30% penalty under Sec. 6662A for an understatement attributable to an undisclosed listed transaction or undisclosed reportable avoidance transaction; and (3) 40% penalty under Sec. 6662 for a gross valuation misstatement if the 30% penalty under Sec. 6662A would have applied, but for the application of Sec. 6662A(e)(2)(c)(ii). Sec. 6707A (e) also provides that the failure to disclose on reports filed with the SEC, as required by the Service, is a failure to include information on a listed transaction, to which the Sec. 6707A penalty applies.

The Sec. 6707A penalty is in addition to any other potentially applicable penalties, including accuracy-related penalties under Secs. 6662 and 6662A, and is imposed regardless of whether the transaction results in a tax underpayment.

Interim Rules

Under interim rules, the Service will impose a penalty under Sec. 6707A on each failure to disclose a reportable transaction within the time and in the form and manner provided by Sec. 6011 and the regulations thereunder. Accordingly, taxpayers will be subject to a penalty under Sec. 6707A for failing to (1) attach a reportable transaction disclosure statement to an original or amended return or (2) provide a copy of a disclosure statement to the IRS Office of Taxpayer Analysis (OTSA), if required. Taxpayers that fail to attach a reportable transaction disclosure statement to an original or amended return and to provide a copy of a required disclosure statement to the OTSA will be subject to a single penalty under Sec. 6707A.

Example 1: T was required to attach a Form 8886, Reportable Transaction Disclosure Statement, to its original return for 2005 and to send a copy of it to the OTSA when it filed its original return. T failed to attach the Form 8886 to its return and to send a copy of the Form 8886 to the OTSA.

T will be subject to the Sec. 6707A penalty, because it did not comply with both of the disclosure requirements. The penalty would also apply if T had failed to comply with either requirement.

Example 2: The facts are the same as in Example 1, except that T subsequently filed an amended 2005 return that reflected its participation in the reportable transaction. T failed to attach Form 8886 to the amended return, as required by Regs. Sec. 1.6011-4(e)(1).

T is subject to an additional penalty under Sec. 6707A for fairing to disclose a reportable transaction.

Effective Date

The penalty applies to each failure to provide a disclosure statement required to be attached to an original or amended return filed after Oct. 22, 2004 (with a copy sent to the OTSA, if required), regardless of whether the original return was due by that date. Under Regs. Sec. 1.6011-4(e) (1), a reportable transaction disclosure statement is due with the filing of a return or an amended return reflecting participation in a reportable transaction. Accordingly, a Sec. 6707A penalty will not be imposed until the taxpayer fails to provide the required disclosure statement with an original or amended return, or a copy to the OTSA, if applicable, even if it files the return after the due date. In addition, the penalty will not be imposed if the disclosure statement is attached to a return filed after the due date, unless taxpayers fail to provide a copy of the disclosure statement to the OTSA, if applicable.

Rescission

Sec. 6707A(d) authorizes the Service to rescind all or any portion of a Sec. 6707A penalty, even if the taxpayer failed to disclose a reportable transaction, when (1) the violation relates to a reportable transaction other than a listed transaction and (2) rescission of the penalty would promote compliance with the Code and effective tax administration. In determining whether rescission would promote such compliance and administration, the Service will take into account all of the relevant facts and circumstances, including whether: (1) taxpayers have a history of complying with the tax laws; (2) the violation results from an unintentional mistake of fact; and (3) imposing the penalty would be against equity and good conscience. The determination whether to rescind a penalty is not reviewable by IRS Appeals or any court. NOTICE 2005-11, IRB 2005-7, 493