Can I Face Tax Penalties for Failing to Report Certain Transactions?

 Posted on September 09, 2021 in Taxation Law

The IRS may assess multiple types of tax penalties against a taxpayer. While the most common penalties involve the failure to file a tax return or pay taxes that are owed, taxpayers may also face penalties for failing to report certain types of transactions. To prevent potential penalties, a taxpayer will need to understand their reporting requirements, and those who are facing penalties may want to engage an attorney to determine options for relief.

Transaction Reporting Requirements

Certain types of transactions must be reported to the IRS by filing Form 8886. Taxpayers involved in such transactions, including individuals, corporations, partnerships, trusts, or estates, must file this form for each reportable transaction. Reportable transactions include the following:

• Listed transactions and transactions of interest - The IRS maintains a list of types of transactions that must be reported because they are commonly used for tax avoidance. These include basket option contracts, distressed asset trust (DAT) transactions, and syndicated conservation easement transactions. Other reportable transactions are considered transactions of interest because they have the potential to be used for tax avoidance.

• Confidential transactions - A transaction must be reported if a taxpayer is required to maintain confidentiality in which they cannot disclose information about the transaction’s tax treatment or tax structure. To qualify as a confidential transaction, a taxpayer must have paid a fee to an advisor. For corporations other than S corporations and partnerships in which all owners or beneficiaries are corporations, the minimum fee is $250,000. For other taxpayers, the minimum fee is $50,000.

• Transactions with contractual protection - If a taxpayer has the right to receive a full or partial refund of fees based on how the IRS addresses the tax consequences or tax benefits of a transaction, these transactions must be reported.

• Loss transactions - Taxpayers must report certain types of transactions that result in the claiming of a loss under Section 165 of the U.S. Tax Code. Corporations other than S corporations and partnerships in which all partners are corporations must report transactions resulting in losses of $10 million in a single tax year or $20 million in multiple tax years. Other taxpayers are usually required to report transactions resulting in losses of at least $2 million in a single tax year or $4 million in multiple tax years. 

Taxpayers who fail to report these types of transactions may face penalties. There is a minimum penalty of $5,000 for individuals or $10,000 for other taxpayers. In most cases, the maximum annual penalty is $10,000 for individuals or $50,000 for other taxpayers. However, failure to report listed transactions can result in a maximum annual penalty of $100,000 for individuals or $200,000 for other taxpayers. 

Generally, a taxpayer can only receive abatement for these penalties if the IRS was not legally allowed to assess the penalty. However a taxpayer may ask that a penalty be rescinded in certain cases. While listed transactions are not eligible for rescission, some or all of the penalties for other transactions may be abated if a taxpayer has used all available remedies when filing an appeal of the penalty, and a taxpayer must agree to the assessment of the penalty and state in writing that they will not pursue any other claims for a credit or refund of the penalty.

Contact Our San Jose Tax Abatement Lawyer

At John D. Teter Law Offices, we can explain your options for addressing tax penalties, and we will help you apply for abatement or rescission of penalties for failure to report transactions to the IRS. Contact our San Jose tax law attorney at 408-866-1810 to learn more about how we can help you resolve tax-related issues.

Sources:

https://www.irs.gov/instructions/i8886

https://www.irs.gov/pub/irs-utl/penalty-reportable-transaction.pdf

https://www.irs.gov/businesses/corporations/listed-transactions