IRS guidance on reportable transaction understatement penalties.

• Author: O'Driscoll, David

In Notice 2005-12, the IRS announced it will issue regulations implementing the Secs. 6662A, 6662 and 6664 accuracy-related penalty provisions for reportable transaction understatements. The notice also provides interim rules that address adequate disclosure, amended returns and disqualified tax advisors.

The American Jobs Creation Act of 2004, Section 812, added Sec. 6662A, which provides a 20% accuracy-related penalty for reportable transaction understatements (30% without adequate disclosure). Section 812 also added Sec. 6664(d), which provides a defense to the Sec. 6662A penalty if the taxpayer acted with reasonable cause and in good faith. Finally, Sections 812 and 819 amended Sec. 6662(d) to modify the accuracy-related penalty for substantial understatements of income tax. The notice provides the following interim rules to implement the requirements of Secs. 6662, 6662A and 6664, which will apply until regulations are issued.

Adequate Disclosure

Sec. 6662A's 30% percent penalty applies to a reportable transaction understatement if the taxpayer does not adequately disclose the relevant facts affecting the tax treatment of an item under Sec. 6011. A taxpayer has adequately disclosed the facts for Secs. 6662A and 6664(d)(2)(A) purposes, if the taxpayer has filed a disclosure statement as prescribed by Regs. Sec. 1.6011-4(d) or has been deemed to have satisfied its disclosure obligations under Rev. Proc. 2004-45, as applicable, or under any other applicable published guidance prescribing Sec. 6011 disclosure.

Special Rule for Amended Returns

In determining the amount of any reportable transaction understatement, the IRS will not take into account an amendment or supplement to a return filed after the dates specified in Regs. Sec. 1.6664-2(c)(3) and Notice 2004-38, which are the dates after which a taxpayer may not file a "qualified amended return."

Disqualified Tax Advisor

A taxpayer may not rely on the opinion of a disqualified tax advisor to establish reasonable belief under Sec. 6664(d). A disqualified tax advisor is any advisor who (1) is a material advisor (under Sec. 6111, as amended) and who participates in the organization, management, promotion or sale of the transaction or is related (within the meaning of Sec. 267(b) or 707(b)(1)) to any person who so participates, (2) has a disqualified compensation arrangement or (3) has a disqualifying financial interest identified by the Secretary.

Organization, management, promotion or...