New Procedures In The Works For Reportable Transaction Penalty

Large Business and International Division Memo LB&I-20-0211-001

A Memo from IRS's Large Business and International Division reveals that IRS is in the process of changing procedures for the reportable transaction penalty, which was eased and otherwise modified by the Small Business Jobs Act of 2010 (SBJA). As explained below, revenue agents are directed to take or forgo certain actions until the final procedures are released.

Background. Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required to be included with the return or statement. Under pre-SBJA law, the penalty applied regardless of whether the transaction resulted in a tax understatement.

Under pre-SBJA law, the penalty for failure to report reportable transactions was $10,000 in the case of a natural person and $50,000 for others ($100,000 and $200,000 respectively for listed transactions).

For penalties assessed after Dec. 31, 2006, the SBJA completely replaced the Code Sec. 6707A penalty structure. Except as provided below, the amount of the penalty with respect to any reportable transaction is 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction if it were respected for federal tax purposes). (Code Sec. 6707A(b)(1))

The amount of the penalty for any reportable transaction for any tax year can't exceed:

1. for a listed transaction, $200,000 ($100,000 in the case of a natural person); and

2. for any other reportable transaction, $50,000 ($10,000 in the case of a natural person). (Code Sec. 6707A(b)(2))

The SBJA also established a minimum penalty for a failure to disclose a reportable or listed transaction. The amount of the penalty for any transaction for any tax year can't be less than $5,000 for a natural person and $10,000 for any other person. (Code Sec. 6707A(b)(3))

RIA recommendation: Since the Act's changes are retroactive (i.e., they are effective for penalties assessed after Dec. 31, 2006), taxpayers who have already paid a Code Sec. 6707A penalty should consider filing a refund claim.

Changed procedures in the works. The Memo notes that procedures are being developed to centralize processing of closed cases (i.e., calculation of new penalty amounts, processing of partial abatements, and notices to impacted taxpayers). It stresses that revised case processing procedures for open and future cases will be developed.

The Memo instructs Revenue Agents to not issue a 30-day letter or process any assessments until further notice. In addition, until procedures are finalized, Revenue Agents are told to:

... contact their Technical Advisor immediately if a statute of limitations on a case will expire within the next 2 months, and the transaction is coordinated through an Issue Management Team (e.g., Code Sec. 412(i), Code Sec. 419A, Abusive Roth IRA).

... continue to develop facts related to the application of the Code Sec. 6707A penalty.

... attempt to calculate the revised penalty; and

... seek assistance from Issue Management Team Technical Advisors and Counsel regarding calculation of the Code Sec. 6707A penalty.

References: For the Code Sec. 6707A penalty, see FTC 2d/FIN ¶V-2282 et seq.; United States Tax Reporter ¶67,07A4; TG ¶71811.