IRS Proposes Changes in Reportable Transaction Penalties

On Friday, Aug. 31, the IRS announced proposed regulation changes for the amount of penalties for failure to disclose required reportable transaction information. According to Forbes contributor and tax law professor Timothy Todd, these new changes require taxpayers to properly disclose reportable transaction information to the to the IRS. Any penalties imposed by IRS for a violation must be disclosed to the Securities and Exchange Commission.

The proposed regulatory changes for a reportable transaction

The IRS proposed the changes to section 6707A regulations to make a clarification of the exact amount in penalties owed for failure to properly disclose reportable transaction information. Specifically, the IRS deems reportable transactions as any transaction with the potential for tax avoidance and/or tax evasion, which include listed transactions and tax shelters. However, the penalties also extend to taxpayers that fail to disclose certain reportable taxes to the SEC. These changes uphold and further elaborate on changes amended under the Small Business Jobs Act of 2010.

The proposal impacts five specific tax regulations

These changes will alter five regulations currently in place, including clarifying the definition of a return, defining the decrease in calculating penalties, explaining the definition of listed transactions, distinguishing the minimum and maximum amounts of the penalties and outlining transactions that are applicable to the penalties.

The definition of a return is clarified in the proposal as simply “return,” as opposed to the current regulations which deem returns as either original, amended or applications for tentative refund.

The next change would clarify the definition of the tax decrease used in calculating the penalties. What this means is that the decrease in tax that the difference in the amount of tax an individual reported on the filed return will be calculated with the amount of tax the individual should have filed on the return. It also clarified that the return with the amount that the individual should have filed will reflect adjusted gross income resulting from his or her participation in the reportable transaction. This is significant because it confirms regulations under section 6707A that deem penalties for failure to disclose reportable transaction are 75 percent of the decrease in tax filed, rather than an exact dollar amount.

Further, the new IRS proposals clearly define listed transactions that need to be reported. This includes taxpayers that participated in a reportable transaction one year prior to the new proposed regulations. Therefore, with these clarified transactions, the new penalty amount will be calculated by the aggregate decrease in taxes for all non-disclosed reportable transactions on all returns. Previous IRS guidance allowed taxpayers to use a single disclosure statement to disclose multiple participation years, which meant that a taxpayer would be subject to only one penalty, regardless of how many unreported transactions existed on the return.

Another major change proposed involves the ambiguity of the penalties applicable for taxpayers failing to report to the SEC. These penalties are now clarified, as are the maximum and minimum amounts of the penalties. With the proposed changes, penalties would be applied to each infraction.