Reportable Transactions: What You Don’t Know Can Hurt You
The American Jobs Creation Act of 2004 (2004 Jobs Act) imposes new penalties on taxpayers who fail to adequately disclose “reportable transactions” to the IRS. Before the 2004 Jobs Act, taxpayers were generally only penalized for not disclosing a reportable transaction if the IRS was successful in challenging the transaction. Accordingly, many taxpayers were not overly concerned about disclosing these transactions, especially if the tax benefits of the transaction were clearly legitimate and/or there was little chance of a successful IRS challenge.
In an attempt to curb the use of abusive tax shelters, new, stiff penalties are in effect for failure to adequately disclose a reportable transaction to the IRS on a return due after October 22, 2004 (the date the 2004 Jobs Act was signed into law). Unlike most other penalties, the law significantly limits the IRS’s ability to rescind or abate these penalties for reasonable cause or other reasons. Accordingly, taxpayers should be extra vigilant in identifying and disclosing these transactions. Taxpayers should not fall into the trap of thinking reportable transactions are limited to abusive tax shelters. The definition of a reportable transaction is very broad and includes many transactions that are routine and perfectly legitimate.
Natural persons who fail to disclose a reportable transaction to the IRS are subject to a $10,000 penalty. Other nonreporting taxpayers are subject to a $50,000 penalty. The penalties are increased to $100,000 and $200,000, respectively, for natural persons and other taxpayers who fail to disclose a reportable transaction that is a listed transaction. If a reportable transaction is not disclosed and results in an understatement of tax, an additional penalty in the amount of 30% of the understatement may be assessed. (If the reportable transaction is disclosed, taxpayers are still subject to a 20% penalty on the understatement of tax.) In addition to the penalties, the statute of limitations is suspended for any listed transaction that is not disclosed.
The IRS has additional information available on its web site (including Treasury Regulations discussed herein) at http://www.irs.gov/businesses/corporations/article/0,,id=97384,00.html.
Reportable Transactions Defined
Listed Transactions
Tax-exempt Entities
Material Advisors
It is very important that reportable transactions be adequately disclosed and that material advisors timely register transactions as required and maintain sufficient documentation. A breach of these rules can result in significant penalties. If you think you are a participant or material advisor in one of these transactions, contact your BKD advisor immediately.
For More Information
Contact your BKD advisor or:Lisa G. Workman
Director of Tax Services
417.831.7283
