Reportable transactions are reported to the IRS using Form 8886, "Reportable Transaction Disclosure Statement." Here is a detailed explanation of the process and requirements for reporting these transactions:
- Form 8886 Filing Requirements:
- Who Must File: Any taxpayer, including individuals, trusts, estates, partnerships, S corporations, or other corporations, that participates in a reportable transaction and is required to file a federal tax return or information return must file Form 8886.
- Separate Forms: Generally, a separate Form 8886 must be filed for each reportable transaction. However, multiple transactions that are the same or substantially similar can be reported on one form.
- Content of Form 8886:
- Description of Transaction: The form must describe the expected tax treatment and all potential tax benefits expected to result from the transaction. It must also describe any tax result protection and identify and describe the transaction in sufficient detail for the IRS to understand the tax structure and identify all parties involved.
- Reportable Transaction Number: If the taxpayer receives one or more reportable transaction numbers, these must be included on the form.
- Attachments: If the information required exceeds the space provided on the form, additional sheets must be attached in the same order as the lines to which they correspond.
- Filing Deadlines:
- Tax Return Attachment: Form 8886 must be attached to the taxpayer's income tax return or information return (including amended returns) for each tax year in which the taxpayer participated in a reportable transaction.
- Copy to OTSA: An exact copy of the initial Form 8886 must also be sent to the Office of Tax Shelter Analysis (OTSA) at the same time it is filed with the tax return. This can be done via mail or fax.
- Special Rules:
- Listed Transactions: If a transaction becomes a listed transaction after the taxpayer has filed a tax return reflecting participation in the transaction, the taxpayer must file Form 8886 with OTSA within 90 days after the transaction becomes listed.
- Loss Transactions: If a transaction becomes a loss transaction because the losses meet the threshold amounts, Form 8886 must be filed as an attachment to the tax return for the first year the threshold is reached and for any subsequent year reflecting any amount of section 165 loss from the transaction.
- Penalties for Non-Compliance:
- Section 6707A Penalty: Failure to include information on Form 8886 can result in a penalty of 75% of the reduction in tax reported on the return due to the transaction, with minimum penalties of $5,000 for individuals and $10,000 for other cases. The maximum annual penalty for listed transactions is $100,000 for individuals and $200,000 for other cases.
- Accuracy-Related Penalty: Under section 6662A, an accuracy-related penalty may be imposed for understatements attributable to reportable transactions, with increased penalties if the transaction is not disclosed.
- Protective Disclosures:
- Taxpayers uncertain about whether a transaction must be disclosed can file Form 8886 on a protective basis, indicating uncertainty and providing all required information.
- Retention of Documents:
- Taxpayers must retain a copy of all documents and records related to the reportable transaction until the expiration of the statute of limitations for the final taxable year for which disclosure was required.
By following these detailed steps and requirements, taxpayers can ensure compliance with the IRS's reporting obligations for reportable transactions.
Sources:
Instructions for Form 8886 (10/2022)
§ 6011. General requirement of return, statement, or list
§ 6707A. Penalty for failure to include reportable transaction information with return
§ 1.6011-4. Requirement of statement disclosing participation in certain transactions by taxpayers.
IRS Proposed Regulations REG-106228-22
T.D. 9046
IRS Proposed Regulations REG-109309-22
