is affected by the reportable transaction. Treas. Reg. 1.6011-4(a), (d)
The regulations describe five classes of reportable transactions: listed
transactions, confidential transactions, transactions with contractual
protection, transactions generating significant losses, and transactions of
interest. Proposed regulations would add a sixth class, patented
transactions. Treas. Reg. § 1.6011(b).
Disclosure must be made on Form 8886. Currently, disclosure on Form
1120 Schedule UTP does not satisfy the disclosure requirement. Rev.
Proc. 2012-15 § 3.07; IRS Announcement 2010-75. Taxpayers will
need to disclose tax shelters resulting in tax reserves on the Schedule
Disclosures must be made for transactions that subsequently are
identified by the Service as a listed transaction or a transaction of
interest. Treas. Reg. § 1.6011-4(e)(2).
If a taxpayer does not make a required disclosure, such failure by the
taxpayer will be treated as strong evidence that the taxpayer did not act
in good faith with respect to the portion of any underpayment
attributable to the transaction. Treas. Reg. § 1.6664-4(d). Thus, a
taxpayer who fails to disclose a reportable transaction is unlikely to
prevail in asserting the reasonable cause defense to the accuracy-related
Code Section 6662A imposes a 20 percent accuracy-related penalty on
“reportable transaction understatements.” For purposes of Code Section 6662A, a
“reportable transaction” is (1) a listed transaction, or (2) a reportable transaction,
if a significant purpose of the transaction is the avoidance or evasion of Federal
income tax. The penalty is increased to 30 percent if the transaction is not
properly disclosed by the taxpayer.
Code Section 6707A imposes a penalty on taxpayers who fail to file required
disclosures with respect to a reportable transaction. The amount of the penalty is
75 percent of the decrease in tax shown on the return as a result of the transaction,
or the decrease in tax that would have resulted from the transaction if it were
respected for Federal tax purposes. The penalty is subject to a minimum amount
of $5,000 for individuals and $10,000 for corporations. The maximum penalty for
failure to disclose a listed transaction is $100,000 for individuals and $200,000 for
corporations; the maximum penalty for failure to disclose any other reportable
transaction is $10,000 for individuals and $50,000 for corporations. Note that the
Code Section 6707A penalty can be imposed in addition to the Code Section 6662
or the Code Section 6662A accuracy-related penalty. This penalty can be imposed
regardless of whether the reportable transaction causes an understatement of tax.
If the item is a “tax shelter,” disclosing the item on the return will not
automatically avoid exposure to accuracy-related penalties. Code §
Penalties can be avoided by declining to claim the tax benefits
associated with the item, thus avoiding the associated tax
“underpayment.” The tax benefits could be claimed subsequently in an
amended return or by an affirmative claim asserted during the
examination process. Code §6662(d)(2)(A).
Penalties also can be avoided by filing a timely Qualified Amended
Return (see ¶ VIII, below), but only if the taxpayer pays the tax and
interest associated with the item. The payment of tax is treated as tax
shown on the original return and eliminates the underpayment on which
the penalty is based. Treas. Reg. § 1.6664-2(c)(2).
A 20 percent accuracy-related penalty applies for understatements with respect to
reportable transactions. Code § 6662A. Failure to disclose the transaction
increases the penalty to 30 percent. Code §6662A(c).
For transactions entered into after March 30, 2010, a strict liability 20 percent
penalty applies for nondisclosed noneconomic substance transactions. Code §
6662(b)(6). Failure to disclose increases the penalty to 40 percent. Code
Code § 6111 requires each “material advisor” with respect to a “reportable
transaction” (as defined in Code § 6707A(c)) to file a return describing the
transaction and the potential tax benefits expected to result from the transaction.
If a material advisor fails to file a return required under Code § 6111, a penalty of
$50,000 will be imposed for such failure. Code § 6707. In the case of listed
transactions, the penalty is increased to the greater of $200,000 or 50 percent of
the gross income derived by the material advisor with respect to the aid,
assistance, or advice provided with respect to the transaction.
Moreover, Code § 6112 requires each material advisor with respect to a
“reportable transaction” (as defined in Code Section 6707A(c)) to maintain a list
of investors in such transaction. If a material advisor who is required by Code §
6112 to maintain an investor list fails to make the list available to the IRS in a
timely manner, the advisor will incur a penalty equal to $10,000 per day after an
initial 20-day period, unless reasonable cause exists. Code § 6708.
Can I Disclose Issues to the IRS After the Tax Return Is Filed?
VIII. Disclosure of Issues on Qualified Amended Returns
Disclosures can be made on a qualified amended return. Treas. Reg. § 1.6664-
Amounts of tax reported on a qualified amended return will be treated as if they
had been reported on the original return for purposes of computing the amount of
the tax “underpayment,” unless the original return reported a fraudulent position.
Treas. Reg. § 1.6664-2(c)(2).
To be “qualified,” the amended return must be filed before: (1) the date the
taxpayer is first contacted concerning an IRS examination; (2) in the case of a
promoted transaction, the date the tax shelter promoter is first contacted
concerning an IRS examination; (3) in the case of a pass-through item, the date
the pass-through entity is first contacted concerning an IRS examination; and (4)
the date a John Doe summons is served on a third party with respect to an activity
of the taxpayer for which the taxpayer claimed a tax benefit, and (5) the date on
which the Service announces a settlement initiative for a listed transaction. Treas.
Reg. § 1.6664-2(c)(3)(i).
If a taxpayer fails to disclose a listed transaction for which a tax benefit is
claimed, an amended return will be treated as a “qualified” amended return only if
it is filed before: (1) the dates described above for qualified amended returns in
general; (2) the date the IRS first contacts a person regarding an examination of
that person’s liability for penalties under Code § 6707(a) with respect to the
undisclosed listed transaction of the taxpayer; and (3) the date on which the
Service requests from a taxpayer’s material advisor (or any person who made a
tax statement for the benefit of the taxpayer) the information required to be
included in a list under Code Section 6112 relating to a transaction that is the
same as, or substantially similar to, the undisclosed listed transaction. Treas. Reg.
IX. “Audit File” Disclosures
Large taxpayers are subject to the Coordinated Industry Case (CIC) Program
(formerly Coordinated Examination Program (CEP)) and are audited for every
Errors, affirmative issues, and other items can be disclosed by a CIC taxpayer to
the IRS at the start of the examination. The disclosure statement is treated as a
qualified amended return. Treas. Reg. § 1.6664-2(c)(4); Rev. Proc. 94-69.
This disclosure procedure will not prevent imposition of penalties if the
disclosed item is attributable to a tax shelter.
Disclosure of issues up front may help to create a better relationship
How Does the IRS Routinely Conduct a Field Examination?
Can I Control the Process?
IRS Audit/Examination Procedures
The IRS is authorized by statute to conduct examinations. Code § 7601. The
IRS’s power to examine taxpayers is broad and difficult to limit.
Certain limits are imposed, such as the requirement that the time and
place of the examination be reasonable under the circumstances and that
the taxpayer not be subject to unnecessary examinations or multiple
examinations for each taxable year. IRC 7605(a) and (b).
Otherwise, the examination may seek any information that “may be
relevant or material.” Code § 7602(a) The IRS’s ability to examine tax
returns and collect information is largely unfettered and difficult to limit.
The IRS’s examination power extends to tax accrual workpapers. See I.R.M. §
4.10.20 (“Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers”).
Tax accrual workpapers are audit workpapers that relate to the tax
reserve for current, deferred and potential or contingent tax liabilities,
however classified or reported on audited financial statements, and to
footnotes disclosing those tax reserves on audited financial statements.
These workpapers reflect an estimate of a company's tax liabilities and
may also be referred to as the tax pool analysis, tax liability contingency
analysis, tax cushion analysis, or tax contingency reserve analysis.
I.R.M. § 22.214.171.124(2).
Taxpayers have claimed that tax accrual workpapers are entitled to
attorney-client privilege and work product protection with mixed
success. Textron Inc. & Subs v. United States, 577 F.3d 21 (1st Cir.
2009). But see Deloitte, LLP v. United States, 610 F.3d 138 (D.C. Cir.
The IRS states that it generally will not request tax accrual workpapers,
absent unusual circumstances. A request will be made when the
examiner identifies a specific issue and needs additional facts, the
examiner has sought facts regarding the issue from the taxpayer and
third parties, and the examiner has sought a supplementary analysis of
facts relating to the issue. I.R.M. § 126.96.36.199.
If the taxpayer has engaged in a listed transaction and disclosed that
transaction, the IRS will request only the portion of the tax accrual
workpapers that concerns that transaction. I.R.M. § 188.8.131.52.2.3.
If the taxpayer did not disclose its listed transaction, or engaged in
multiple listed transactions, the IRS will request all tax accrual
Taxpayers should ask the IRS for an audit plan and a timetable.
Taxpayers should seek to negotiate the scope and timing of the audit.
Taxpayers should seek to control what documents and information the
agents obtain access to, and should keep track of what materials the
agents have examined. Taxpayers should document all meetings in
order to ensure a record of information provided orally and IRS
positions or representations.
Taxpayers should designate persons to whom the IRS can direct requests
for information and should ask that the IRS submit its requests for
Documents you may be interested
Documents you may be interested