IRS Issues Final Regulations on Penalties for Reportable Transactions

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The Internal Revenue Service (IRS) issued final regulations under Code § 6707A regarding the penalty for the failure to report on Form 8886 “reportable transactions” and “listed transactions,” including listed transactions involving employee benefit arrangements. “Reportable transactions” are transactions the IRS determines as having a potential for tax avoidance or evasion pursuant to regulations under Code § 6011. “Listed transactions,” a subset of reportable transactions, are “the same or substantially similar” to transactions that the IRS has determined to be tax avoidance transactions and have been identified in published guidance.

The final regulations reflect the changes made to the penalty calculation under Code § 6707A by the Small Business Jobs Act of 2010 (the “Jobs Act”). Under the Jobs Act, the amount of the Code § 6707A penalty was revised generally to make the penalty proportionate to the decrease in tax shown on the return as a result of a reportable transaction (i.e., 75% of the incremental decrease). Prior to the Jobs Act, the penalty was a specific fixed-dollar amount without reference to the amount of tax benefit, so the penalty could exceed the tax benefit of the transaction.

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