Page 3 - A Crash Course On Reportable Transaction Penalties For Material Advisors

First, the material advisor must file Form 8918, Material Advisor Disclo- sure Statement. The Form 8918 must be filed with the Office of Tax Shelter Analysis (OTSA).23 The Form 8918 must be filed by the last day of the month that follows the end of the cal- endar quarter in which the advisor became a material advisor with re- spect to the reportable transaction or in which the circumstances necessi- tating an amended disclosure state- ment occurred.24 After receipt of the Form 8918, the IRS will issue a re- portable transaction number to the material advisor, and the material ad- visor must provide that number to all taxpayers and other material advisors on the transaction so that they can comply with their own reporting ob- ligations.25
A material advisor who is uncer- tain as to whether a transaction must be disclosed may file a protective dis-
that material advisors must file their reports by 5/1/17.29
Material advisors must also main- tain a list of taxpayers who partici- pated in a reportable transaction, and furnish that list on written request of the IRS.30 The material advisor must furnish the list to the Service within 20 business days from the date of the Service’s request.31 These lists must identify each person to whom or for whose benefit the material advisor has made a tax statement, and include detailed information about the trans- actions, such as the investors, the amounts invested, the structure of the transaction, the tax benefits expected from the transaction, and the names of any other material advisors.32 The IRS has created an optional Form 13976, Itemized Statement Compo- nent of Advisee List, to help material advisors comply with the list main- tenance rules.33The material advisor
or 75% of the gross income so derived.38 All gross income derived with respect to a listed transaction, in- cluding all transactions substantially similar to the listed transactions (even those for which the advisor did not meet the gross income threshold) is included in the calculation of this penalty.39
The Service must assess penalties within three years of the filing of the Form 8918, but if the material advisor never files, the penalty may be as- sessed at any time.40
There is no reasonable cause de- fense for Form 8918 penalties. Never- theless, regulations exclude from the definition of “false” or “incomplete” in- formation that is immaterial, untrue, or incorrect due to a mistake or acci- dent after the exercise of reasonable care.41 Moreover, the IRS has discre- tion to rescind the penalty for non- listed transactions based on the par- ticular facts and circumstances. A primary factor that the IRS will con- sider is “the extent of the material ad- visor’s efforts” to learn the filing re- quirements.42 Other facts and circumstances include whether: (1) the material advisor corrected the disclo- sure after learning of his or her non- compliance; (2) the material advisor made a reasonable mistake of fact; (3) the noncompliance was due to events outside of the material advisor’s con- trol; (4) the material advisor’s compli- ance history and cooperation with the IRS; and (5) imposing the penalty would be in equity and good con- science.43 The IRS does not consider doubt as to collectability or economic hardship.44 For material advisors who failed to comply with the Form 8918 filing requirements regarding listed transactions, the IRS will not rescind the penalty, making it a strict liability penalty.
A material advisor who fails to comply with the list maintenance rules is subject to a penalty of $10,000 for each day after the twentieth busi- ness day that the material advisor fails to provide the list.45 There is no max- imum penalty amount, and the penalty is cumulative.46 We have seen the potentially devastating penalties
cThe regulations state that a person becomes a material advisor on
the date that the transaction is identified as a listed transaction or a transaction of interest.
closure. As noted at the beginning of the article, if one is not certain about whether the transaction is reportable or whether one is a material advisor, he or she can file a protective disclo- sure.26
If the IRS identifies a transaction as a listed transaction or transaction of interest after the fact, the material advisor must report it then. Regula- tions state that a person becomes a material advisor on the date that the transaction is identified as a listed transaction or a transaction of interest.27 The material advisor must then file the Form 8918 by the last day of the month that follows the end of the calendar quarter in which the ad- visor became a material advisor with respect to the reportable transaction.28 For example, on 12/23/16, the IRS listed syndicated easement transac- tions, and stated in the listing notice
must also maintain, and produce to the IRS on request, the documents re- lated to the transaction.34
MATERIAL
ADVISOR PENALTIES
There are harsh penalties for material advisors who fail to comply with these rules. These penalties apply even if there is no tax deficiency.35 A mate- rial advisor who fails to file a Form 8918, or files a false or incomplete Form 8918, is subject to a penalty of $50,000 for each violation.36 This penalty is increased to $200,000, or one-half of the gross income derived by the material advisor with respect to such transaction, if the transaction is a listed transaction.37 If the failure or action on which the penalty is based is intentional, then the penalty is increased to the greater of $200,000
162 BJOuRnAl Of TAxATiOnG OCTObeR 2017
fRAuD & neGliGenCe