IRS guidance on reportable transaction understatement penalties.
The American Jobs Creation Act of 2004, Section 812, added Sec. 6662A, which provides a 20% accuracy-related penalty for reportable transaction understatements (30% without adequate disclosure). Section 812 also added Sec. 6664(d), which provides a defense to the Sec. 6662A penalty if the taxpayer acted with reasonable cause and in good faith. Finally, Sections 812 and 819 amended Sec. 6662(d) to modify the accuracy-related penalty for substantial understatements of income tax. The notice provides the following interim rules to implement the requirements of Secs. 6662, 6662A and 6664, which will apply until regulations are issued.
Sec. 6662A's 30% percent penalty applies to a reportable transaction understatement if the taxpayer does not adequately disclose the relevant facts affecting the tax treatment of an item under Sec. 6011. A taxpayer has adequately disclosed the facts for Secs. 6662A and 6664(d)(2)(A) purposes, if the taxpayer has filed a disclosure statement as prescribed by Regs. Sec. 1.6011-4(d) or has been deemed to have satisfied its disclosure obligations under Rev. Proc. 2004-45, as applicable, or under any other applicable published guidance prescribing Sec. 6011 disclosure.
Special Rule for Amended Returns
In determining the amount of any reportable transaction understatement, the IRS will not take into account an amendment or supplement to a return filed after the dates specified in Regs. Sec. 1.6664-2(c)(3) and Notice 2004-38, which are the dates after which a taxpayer may not file a "qualified amended return."
Disqualified Tax Advisor
A taxpayer may not rely on the opinion of a disqualified tax advisor to establish reasonable belief under Sec. 6664(d). A disqualified tax advisor is any advisor who (1) is a material advisor (under Sec. 6111, as amended) and who participates in the organization, management, promotion or sale of the transaction or is related (within the meaning of Sec. 267(b) or 707(b)(1)) to any person who so participates, (2) has a disqualified compensation arrangement or (3) has a disqualifying financial interest identified by the Secretary.
Organization, management, promotion or sale: A material advisor participates in the "organization" of a transaction if the advisor:
1. Devises, creates, investigates or initiates the transaction or tax strategy;
2. Devises the business or financial plans for the transaction or tax strategy;
3. Carries out those plans through negotiations or transactions with others; or
4. Performs acts relating to the development or establishment of the transaction.
A material advisor participates in the management of a transaction if he or she is involved in the decision-making process regarding any business activity as to the transaction. Participation in the management includes managing assets, directing business activity, or acting as a general partner, trustee, director or an officer of an entity involved in the transaction.
A material advisor participates in the "promotion or sale" of a transaction if the material advisor is involved in the marketing of the transaction or tax strategy. Marketing activities include: (1) soliciting (directly or through an agent) tax-payers to enter into a transaction or tax strategy using direct contact, mail, telephone or other means; (2) placing an advertisement for the transaction in a newspaper, magazine or other publication or medium; or (3) instructing or advising others on marketing of the transaction or tax strategy.
Consistent with the legislative history, a tax advisor (including a material advisor) will not be treated as participating in the organization, management, promotion or sale of a transaction if the tax advisor's only involvement is rendering an opinion on the transaction's tax consequences. In the course of preparing a tax opinion, a tax advisor is permitted to suggest modifications to the transaction, but may not suggest material modifications to the transaction that assist the taxpayer in obtaining the anticipated tax benefits. Merely performing support services or ministerial functions (e.g., typing, photocopying or printing) will not be deemed participation in the organization, management, promotion or sale of a transaction.
Disqualified compensation arrangements: A disqualified tax advisor includes one who has a disqualified compensation arrangement. A disqualified compensation arrangement includes (1) an arrangement by which the advisor is compensated, directly or indirectly, by a material advisor with respect to the transaction or (2) a fee arrangement for the transaction contingent on all or part of the intended tax benefits from the transaction being sustained; see Sec. 6664(d)(3)(B)(ii).
Until further guidance is issued, a tax advisor also will be treated as a disqualified tax advisor, even if not a material advisor, if he or she has a referral fee or a fee-sharing arrangement by which the advisor is compensated directly or indirectly by a material advisor. In addition, an arrangement will be treated as a disqualified compensation arrangement if there is an agreement or understanding (oral or written) with a material advisor of a reportable transaction under which the tax advisor is expected to render a favorable opinion on the tax treatment of the transaction to any person referred by the material advisor. A tax advisor will not be treated as having a disqualified compensation arrangement if a material advisor merely recommends the tax advisor (who does not have an agreement or understanding with the material advisor) to render a favorable opinion regarding the tax treatment.
In addition, a disqualified compensation arrangement includes a fee contingent on all or part of the intended tax benefits from the transaction being sustained, including agreements that provide that (1) a taxpayer has the right to a full or partial refund of fees if all or part of the tax consequences from the transaction are not sustained; or (2) the fee is contingent on the taxpayer's realization of tax benefits from the transaction. Transactions described in Regs. Sec. 1.6011-4(b)(4)(iii) do not give rise to a disqualified compensation arrangement.
NOTICE 2005-12, IRB 2005-7,494
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|Publication:||The Tax Adviser|
|Date:||Apr 1, 2005|
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