Understanding Reportable Transactions: What Tax Preparers Need to Know

Many tax preparers may not often run into a reportable transaction situation, however most returns require disclosures about whether an entity does or doesn’t have an affected transaction to report. It’s important for all preparers to understand what transactions fall into the reportable category and when to disclose more information.

Reportable transactions are certain types of transactions that the IRS has identified as potentially abusive and require additional disclosure, specifically on the tax return itself.

The IRS has established five categories of reportable transactions:

  1. Listed transactions
  2. Confidential transactions
  3. Transactions with contractual protection
  4. Loss transactions
  5. Transactions of interest

Among these, listed transactions are the most significant. These are transactions the IRS has specifically identified in notices, regulations, or other published guidance as tax-avoidance transactions. Currently, there are 36 listed transactions in effect, with three more proposed.

To review the current see detailed descriptions of each on the IRS website.

Among these are some transactions that are more common than you may expect such as stock compensation transactions, S Corp ESOPs, and intercompany financing arrangements in partnerships.

Recent court decisions, such as Mann Construction, Inc. v. United States, have led the IRS to change how it identifies listed transactions. The courts have ruled that the IRS must follow the Administrative Procedure Act (APA) when identifying listed transactions, which requires publishing a notice of proposed rulemaking, allowing for public comment, considering the comments, and including a concise general statement of the final rule’s contents.

In response, the IRS has begun issuing proposed regulations to identify listed transactions, such as those related to syndicated conservation easements, microcaptive transactions, Malta personal retirement schemes, and monetized

installment sales. The proposed regulations are subject to a public comment period and a hearing before being finalized.

Tax preparers must be aware of these reportable transactions because failing to comply with the disclosure rules can result in penalties under Sections 6662A, 6707, 6707A, and 6708 for both taxpayers and material advisors. Additionally, failure to disclose listed transactions could extend the assessment period of limitation under Section 6501(c)(10), creating greater exposure risk for both you and your clients.

If a client has participated in a transaction described in the proposed regulations or a substantially similar transaction, tax preparers should be prepared to file Form 8886, Reportable Transaction Disclosure Statement, once the regulations are finalized. Material advisors may also have disclosure obligations using Form 8918, Material Advisor Disclosure Statement, and list maintenance requirements.

As the IRS continues to identify new listed transactions through proposed regulations, tax preparers must stay vigilant and adapt their practices accordingly. Most critically, tax preparers should be familiar with the transactions on the current list. Preparers who often do not deal with complex returns may be tempted to assume their clients do not have transactions that fit into the descriptions but without proper knowledge, both you and your clients can be at risk.

Christine Gervais

Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.

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