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Highlights of § 6707A Temporary and Proposed Regulations

Introduction:

  • On September 10, 2008, IRS issued temporary and proposed regulations under IRC § 6707A.  These regulations provide guidance on the assertion and rescission of the penalty.

  • The text of the temporary regulations also serves as the text of the proposed regulations.

Background:

  • § 6707A provides a monetary penalty for the failure to include on any return or statement any information required to be disclosed under § 6011 with respect to a reportable transaction.

  • For failure to disclose a non-listed reportable transaction, the §6707A penalty is $10,000 if the taxpayer is an individual, and $50,000 for all other taxpayers.  If the violation involves a listed transaction, the penalty is $100,000 for individuals and $200,000 for all other taxpayers.

  • Regulation § § 1.6011-4(a) and (d) generally require that a taxpayer file a disclosure statement on Form 8886, "Reportable Transaction Disclosure Statement" (or successor form) for each reportable transaction in which the taxpayer participated.

  • Regulation § 1.6011-4(e)(1) provides that a disclosure statement for a reportable transaction must be attached to the taxpayer's tax return for each taxable year for which a taxpayer participates in a reportable transaction. In addition, a disclosure statement for a reportable transaction must be attached to each amended return that reflects a taxpayer's participation in a reportable transaction.

  • The taxpayer also must send a copy of the disclosure statement to the IRS Office of Tax Shelter Analysis (OTSA) at the same time that any disclosure statement pertaining to a particular reportable transaction is first filed.

  • If a reportable transaction results in a loss that is carried back to a prior year, the disclosure statement for the reportable transaction must be attached to the taxpayer's application for tentative refund or amended tax return for that prior year.

  • If a taxpayer who is a partner in a partnership, a shareholder in an S corporation, or a beneficiary of a trust receives a timely Schedule K-1, "Partner's Share of Income, Deductions, Credits, etc.," less than 10 calendar days before the due date of the taxpayer's return (including extensions) and, based on receipt of the timely Schedule K-1, the taxpayer determines that the taxpayer participated in a reportable transaction, the disclosure statement will not be considered late if the taxpayer discloses the reportable transaction by filing a disclosure statement with OTSA within 60 calendar days after the due date of the taxpayer's return (including extensions).

  • For transactions entered into after August 2, 2007, regulation § 1.6011-4(e)(2)(i) provides that if a transaction becomes a listed transaction or a transaction of interest after the filing of a taxpayer's tax return (including an amended return) reflecting the taxpayer's participation in the listed transaction or transaction of interest and before the end of the period of limitations for assessment of tax for any taxable year in which the taxpayer participated in the listed transaction or transaction of interest, then a disclosure statement must be filed with OTSA within 90 calendar days after the date on which the transaction became a listed transaction or a transaction of interest, regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or a transaction of interest.

  • A taxpayer who is required to disclose a reportable transaction on a Form 8886 (or successor form) filed with a return, amended return, or application for tentative refund and who also is required to disclose the transaction on a Form 8886 (or successor form) with OTSA, is subject to only a single section 6707A penalty for failure to make either one or both of those disclosures.

  • § 6707A(e) further provides that taxpayers who are required to file periodic reports under Sections 13 or 15(d) of the Securities and Exchange Act of 1934 or are required to be consolidated with another person for purposes of such reports, must disclose their liability for §6707A(b)(2), § 6707A(e), § 6662A(c), or § 6662(h) penalties in those reports.  The penalty for failing to disclose the requirement to pay one of these penalties is $200,000.

  • The §6707A penalty is in addition to any other penalty that may be imposed, and applies without regard to whether the transaction ultimately results in an understatement.

  • Unlike many other penalties, the §6707A penalty contains no reasonable cause exception.  Also, unlike most other penalties, §6707A allows the Commissioner to rescind the imposition of the penalty with respect to reportable non-listed transactions if it would “promote compliance with the tax laws and effective tax administration.”  The penalty cannot be rescinded with respect to a listed transaction.

Highlights:

  • The temporary regulations provide excellent examples on assessing the § 6707A penalty.

  • The temporary regulations restate the authority of the Secretary to prescribe the procedures to request rescission of the § 6707A penalty by revenue procedure or other published guidance.

  • Rev. Proc. 2007-21 describes the procedures for requesting rescission of the § 6707A penalty.

  • The temporary regulations generally adopt the list of factors weighing in favor of and against granting rescission stated in Rev. Proc. 2007-21.

  • One additional factor the regulations identify as weighing in favor of granting rescission is whether the penalty assessed is disproportionately larger than the tax benefit received.

  • The factors identified in the temporary regulations do not represent an exclusive list, and no single factor will be determinative of whether to grant rescission in any particular case. Rather, the Commissioner (or the Commissioner's delegate) will consider and weigh all relevant factors, regardless of whether the factor is included in this list.

  • The temporary regulations mirror Rev. Proc. 2007-21 in providing that a rescission request is not the appropriate forum to contest whether the elements necessary to support a penalty under section 6707A exist. That question is for the examining agent, the IRS Appeals Division, and the courts.

  • A rescission determination is based on the premise that a violation of section 6707A exists but, nonetheless, the penalty should be rescinded (or abated). Accordingly, the temporary regulations provide that the Commissioner (or the Commissioner's delegate) will not consider whether the taxpayer in fact failed to comply with section 6011.

  • The temporary regulations provide that the Commissioner (or the Commissioner's delegate) will not take into consideration doubt as to liability for, or collectibility of, the penalties in determining whether to rescind the penalty.

  • The temporary regulations restate the existing authority of the Secretary to prescribe by revenue procedure or other guidance published in the Internal Revenue Bulletin the manner in which taxpayers must disclose the requirement to pay certain penalties on reports filed with the Securities and Exchange Commission.

  • Rev. Procs. 2005-51 and 2007-25 are the current published guidance items that provide these disclosure rules and remain effective until further guidance is issued in the form of regulations or other guidance that explicitly supersedes these two documents.

  • The temporary regulations supersede Notice 2005-11.

  • The temporary regulations apply to disclosure statements that are due after September 11, 2008.
Page Last Reviewed or Updated: 02-Dec-2013