IRS guidance on reportable transaction disclosure penalties.

• Author: O'Driscoll, David

In Notice 2005-11, the IRS announced that it will issue regulations under Sec. 6707A, that will apply to returns and statements due after Oct. 22, 2004. The notice also provides interim rules on the imposition and rescission of Sec. 6707A penalties.

New Disclosure Penalties

The American Jobs Creation Act of 2004 (AJCA), Section 811, added Sec. 6707A to provide a monetary penalty for the failure to include on any return or statement information required to be disclosed on a reportable transaction under Sec. 6011. Prior to the AJCA, there was no such penalty for failure to disclose a reportable transaction.

Sec. 6707A(b) provides that the penalty for failing to include information on a reportable transaction (other than a listed transaction) is $10,000 for a natural person and $50,000 in any other case. The penalty for failing to include information on a listed transaction is $100,000 for a natural person, and $200,000 in any other case.

Sec. 6707A(e) provides that a person required to file periodic reports under Sec. 13 or 15(d) of the Securities Exchange Act of 1934, or required to be consolidated with another person for purposes of those reports, must disclose the requirement to pay the following penalties in reports to the Securities and Exchange Commission (SEC) for periods specified by the IRS: the (1) Sec. 6707A penalty for failure to disclose a listed transaction; (2) 30% penalty under Sec. 6662A for an understatement attributable to an undisclosed listed transaction or undisclosed reportable avoidance transaction; and (3) 40% penalty under Sec. 6662 for a gross valuation misstatement if the 30% penalty under Sec. 6662A would have applied, but for the application of Sec. 6662A(e)(2)(c)(ii). Sec. 6707A (e) also provides that the failure to disclose on reports filed with the SEC, as required by the Service, is a failure to include information on a listed transaction, to which the Sec. 6707A penalty applies.

The Sec. 6707A penalty is in addition to any other potentially applicable penalties, including accuracy-related penalties under Secs. 6662 and 6662A, and is imposed regardless of whether the transaction results in a tax underpayment.

Interim Rules

Under interim rules, the Service will impose a penalty under Sec. 6707A on each failure to disclose a reportable transaction within the time and in the form and manner provided by Sec. 6011 and the regulations thereunder. Accordingly, taxpayers will be subject to a penalty under Sec. 6707A...