This update is to alert you to substantial penalties that the IRS can impose for failure to disclose “reportable transactions,” transactions identified by the IRS as having a potential for tax avoidance or evasion. Reportable transactions are divided into five categories discussed below.
The penalty for failure to disclose a reportable transaction is 75% of the decrease in tax as a result of the transaction. The maximum penalty for each such failure to disclose a “listed transaction” on the appropriate tax return is $100,000 for an individual and $200,000 for other taxpayers. The maximum penalty for failure to disclose any other reportable transaction is $10,000 for an individual and $50,000 for other taxpayers. The minimum penalties are $5,000 for an individual and $10,000 for other taxpayers. In addition to IRS penalties, certain states have adopted similar disclosure requirements and large penalties for failure to comply.
Listed Transactions – As of the date of this letter, the IRS has identified 34 listed transactions which are summarized on the attachment to this letter. Each transaction has a reference to the IRS Notice or other ruling naming the transaction as a “listed transaction” and providing details about it. You may get further information from the IRS web site atwww.irs.gov/businesses/corporations. In the Search bar, type “Listed Abusive Tax Shelters and Transactions”.
Confidential Transactions – Transactions that are offered under conditions of confidentiality limiting what you can disclose about the tax treatment or structure of the transaction and for which you or a related party paid an advisor a minimum fee. The minimum fee for a transaction is $250,000 for corporations (and partnerships or trusts in which all of the owners or beneficiaries are corporations) and $50,000 for all other taxpayers.
Transactions with Contractual Protection – Transactions for which you, or a related party, have the right to a full or partial refund of fees if all or part of the intended tax consequences are not sustained. These also include transactions for which fees are contingent on your realization of tax benefits from the transaction.
Loss Transactions – Transactions resulting in losses under IRC Sec. 165 for individuals, partnerships, S corporations and trusts that are at least $2 million in any single tax year or $4 million in any combination of tax years. The thresholds for C corporations (and partnerships with only C corporations as partners) are $10 million in any single tax year or $20 million in any combination of tax years. In addition, the threshold for individuals or trusts with losses arising from certain foreign currency transactions is $50,000 in any single taxable year.
Transactions of Interest – As of the date of this letter, the IRS has identified four transactions of interest which are also summarized on the attachment to this letter.
Please carefully review this letter and the attachments, then notify us as soon as possible if you believe you may have participated in one of the described transactions. We will not evaluate whether a transaction is a reportable transaction in providing tax advice unless you specifically request us to do so. We can evaluate any transaction or perform additional procedures if you would like a higher level of assurance concerning the existence or status of any reportable transactions. If you have any questions concerning application of these rules to a specific transaction, please contact us.