Reportable Transactions Resources - Article
The IRS Says:
|Warning: Material Advisors Must Disclose Reportable
any of these
|Natural persons who fail
to disclose a reportable
transaction to the IRS
are subject to a $50,000
The penalties are
increased to $100,000
respectively, for natural
persons and other
taxpayers who fail to
disclose a reportable
transaction that is a
Both material advisors and taxpayers must disclose information about reportable transactions to the Internal
Revenue Service. Material advisors often forget this step. But those who provide material aid, assistance, or advice on any
reportable transaction must file a specific form to report this information, and those who do not face significant fines.
Congress has enacted a series of income tax laws designed to halt the growth of abusive tax avoidance transactions. These
provisions include the disclosure of reportable transactions. Each taxpayer that has participated in a reportable transaction and
that is required to file a tax return must disclose information for each reportable transaction in which the taxpayer participates.
Material advisors use IRS Form 8918.
IRS Form 8886 is the proper mechanism used by taxpayers to disclose information for each reportable transaction in which
participation has occurred. Generally, Form 8886 must be attached to the tax return for each tax year in which participation in a
reportable transaction has occurred. If a transaction is identified as a listed transaction or transaction of interest after the filing
of a tax return (including amended returns), the transaction must be disclosed either within 90 days of the transaction being
identified as a listed transaction or a transaction of interest or with the next filed return, depending on which version of the
regulations is applicable.
One particular reportable transaction that must be disclosed is a loss transaction.
Losses that must be reported on Forms 8886 and 8918:
If a taxpayer claims a loss under Section 165 of at least one of the following amounts on a tax return, then the taxpayer has
participated in a loss transaction and must file Form 8886. If an advisor provides material aid, assistance, or advice on a
transaction that results in a taxpayer claiming a § 165 loss of at least one of the following amounts and meets other filing
requirements; then the advisor is a material advisor and must file Form 8918.
- For individuals, at least $2 million in a single tax year or $4 million in any combination of tax years.
- For corporations (excluding S corporations), at least $10 million in any single tax year or $20 million in any combination of
- For partnerships with only corporations (excluding S corporations) as partners (looking through any partners that are also
partnerships), at least $10 million in any single tax year or $20 million in any combination of tax years, whether or not any
losses flow through to one or more partners.
- For all other partnerships and S corporations, at least $2 million in any single tax year or $4 million in any combination of
tax years, whether or not any losses flow through to one or more partners or shareholders.
- For trusts, at least $2 million in any single tax year or $4 million in any combination of tax years, whether of not any losses
flow through to one or more beneficiaries.
- A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross
amount of the loss is at least $50,000 in a single tax year for individuals or trusts, whether or not the loss flows through
from an S corporation or partnership.
Taxpayers whose filed return does not reflect a section 165 loss that equals or exceeds the applicable threshold amount have
not participated in a loss transaction. If you are a partner, shareholder, or beneficiary of a pass-through entity, you have
participated in a loss transaction if your tax return reflects a section 165 loss allocable to it from the pass-through entity that
equals or exceeds the applicable threshold amount.
Losses that do not have to be reported on Forms 8886 and 8918:
- Loss from casualties, thefts, and condemnations
- Loss from Ponzi Scheme
- Loss from the sale or exchange of an asset with a qualifying basis
- Loss arising from any mark-to-market treatment of an item
What is important to remember is that where or not there is a loss, a material advisor still needs to report the transaction or face
possible fines and penalties. While it may seem like filing a form is simple, the instructions for filing are somewhat vague and
anyone involved in such a transaction should seek out a well-qualified expert to assist with the proper completion of the forms.
The IRS can still penalize a filer for not preparing the form properly.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or
other entity. You should contact an appropriate professional for any such advice.