The road to transparency.

• Author: Murray, Erica

The days of handing the IRS a big box of receipts in an audit have long since passed. Amid pressure to collect tax revenue, notable frauds perpetrated by businesses, and greater technological capabilities, the federal government has drastically increased its examination tools over the past decade. Although technological advance have skyrocketed, the main result of this trend has been increasing disclosure burdens on both taxpayers and preparers. Examples abound, but perhaps the most notable changes over the past decade concern reportable transactions, the introduction of Schedule M-3, and most recently the potential disclosure of uncertain tax positions to be submitted with annual tax returns. Taxpayers are being left increasingly exposed, and practitioners are being burdened with additional time, effort, and risk for these compliance clients.

Reportable Transactions

Under the IRS Restructuring and Reform Act, P.L. 105-206, the Joing Committee on Taxation conducted a number of studies in 1999 that were primarily concerned with corporate tax shelters. One of the main products of those studies was Reg. Sec. 1.6011-4, requiring disclosure of certain "reportable transactions" in which taxpayers have participated.

Under the regulation as it stands today, there are essentially six main categories of transactions that trigger mandatory disclosures for taxpayers on IRS Form 8886, Reportable Transaction Disclosure Statement (see Reg. Sec. 1.6011-4(b) for more details):

* Listed transactions;

* Confidential transactions;

*Transactions with contractual protection;

* Loss transactions;

* Transactions of interest; and

* Transactions involving a brief assetholding period.

The IRS has identified these transactions as having a risk of abuse by taxpayers and/or tax advisers. The IRS wants full disclosure of these items, including the tax treatment and expected benefit, a complete description of the transaction, and identification of all related parties. Initially, the IRS had issues with noncompliance due to a lack of penalties associated with nondisclosure, so in the American Jobs Creation Act of 2004, P.L. 108-357, substantial new or increased penalties were imposed without regard to taxpayer intent (i.e., tax avoidance). Currently, under Sec. 6707A, Individuals are required to pay a penalty of $10,000 and all other entities a $50,000 penalty for failure to report. These penalties are in addition to any other penalties the IRS has in place, including...