Form 8275 Disclosure Statements and Form 8886 Reportable Transactions: Divulging Transactions to the IRS

Description

Tax practitioners continue to struggle with the need to disclose sticky transactions and the preparation of related Forms 8275, 8275-R, and 8886. Under Section 6662, a 20 percent underpayment penalty or 40 percent (for certain gross valuation misstatements) can be assessed when a taxpayer takes a position contrary to a rule or regulation.

There are two ways to avoid this substantial underpayment penalty. One is if the item's tax treatment is supported by "substantial authority." The second is if the transaction is adequately disclosed on Form 8275 or 8275-R, and there is “reasonable authority” for the position taken. Updated annually, Revenue Procedure 2020-54 identifies circumstances where disclosure on a taxpayer's return is considered adequate.

More recognizable, reportable transactions must be disclosed, and include listed transactions, transactions of interest (TOIs), confidential transactions, and certain loss transactions. The IRS specifically identifies listed transactions. Syndicated conservation easements, micro-captive transactions, and inflated partnership transactions (Son of Boss) are among those named. Taxpayers with these transactions are required to file Form 8886.

The IRS can impose a minimum penalty of $5,000 for individual taxpayers or a 75 percent penalty, based on the tax savings, under Section 6707A for failure to disclose reportable transactions properly. These penalties are cumulative and continue to run as long as the taxpayer participates in the transaction.

Listen as our panel of tax experts explains when these forms should be added to a taxpayer's return, the differences in the levels of authority, the IRS' response to receipt of these disclosure statements, and avoiding preparer penalties for unreasonable positions.