Page 4 - A Crash Course On Reportable Transaction Penalties For Material Advisors

that can be imposed for failure to re- spond to a list maintenance request in Callister Nebeker & McCullough,47 in which the IRS assessed a penalty of $11.28 million against a law firm after an approximately 1,128-day delay in providing the list and other docu- ments. In that case, the IRS sent the firm a list maintenance request, but the firm objected to it, and the IRS then issued summonses. The govern- ment brought a summons enforce- ment action, and once that was re- solved, the IRS assessed a penalty of $10,000 for every day (after the twen- tieth business day) that the firm had not responded.
Although the case was dismissed by stipulation of the parties,48 and we thus will never know the court’s view on the penalties, the case is an impor- tant reminder that the list mainte- nance penalties can be extremely onerous and that advisors should make their best efforts to maintain the required information and respond by the 20-business-day deadline. Also, if there is a question about whether a transaction is a reportable transaction or the advisor is a material advisor, the advisor should consider submit- ting a timely protective response rather than risk penalties and be forced to attempt to persuade the IRS and/or a court that it was not re- quired to maintain the list.
Prior to the expiration of the 20- business day period following a list request, the Service has discretion to extend the deadline for production of
NOTES
23 The OTSA reviews disclosures to identify potentially abusive transactions. Ann. 2000-12.
24 Section 6111(a); Reg. 301.6111-3(e); notice 2007-85, 2007- 2 Cb 965.
25 The material advisor must provide the reportable transaction number when the transaction is entered into, or if the transaction is entered into prior to receipt of the number, within 60 days after the iRS mails the number to the material advisor. Reg. 301.6111-3(d)(2). in addition, the taxpayer is required to file a disclosure statement on form 8886, Reportable Transaction Dis- closure Statement, for each reportable transaction in which the taxpayer has participated. Regs. 1.6011-4(d), (e).
26 This is done by filing a complete form 8918 with a banner stating “Protective Disclosure” at the top. Reg. 301.6111-3(g).
27 Reg. 301.6111-3(4)(b)(iii).
28 Reg. 301.6111-3(4)(e).
the list if the person seeking the ex- tension establishes that this deadline “cannot reasonably be met despite diligent efforts by the person to main- tain the materials constituting a list and to make that list available to the Service in the time and manner re- quired by the Secretary under section 6112.”49 The Service may grant the re- quest, in full or in part, after consid- ering whether granting an extension “will impair its ability to make a timely assessment against any of the partic- ipants in the transaction associated with the requested list.”50 The regula- tions make clear that the IRS will not grant extensions except in limited cir- cumstances where the inability to re- spond is truly beyond the advisor’s control. Accordingly, advisors should expect that extension requests will not be granted and prepare to respond within the deadline.
There is a reasonable cause excep- tion to list maintenance penalties. The most important factor is the material advisor’s good faith effort to comply with Section 6112.51 Such good faith includes the material advisor’s efforts to: (1) determine or assess status as a material advisor; (2) determine the in- formation and documentation re- quired to be maintained; (3) meet its obligations to maintain a readily-pro- ducible list; (4) make the list available to the Service within the 20-day busi- ness period (or any extended period); and (5) ensure that the list furnished to the Service is accurate and com- plete.52
29 notices 2017-20, 2017-11 iRb 1010 and 2017-29, 2017- 20 iRb 1243.
30 Section 6112; Reg. 301.6112-1(a).
31 Section 6708(a)(1); Reg. 301.6112-1(e)(1).
32 Regs. 301.6112-1(b)(2) and (3).
33 Rev. Proc. 2008-20, 2008-1 Cb 980.
34 Reg. 301.6112-1(b)(3)(iii)(A)-(b). The material advisor
must retain the list and related documents for seven years following the earlier of the date the transaction was entered into, or when the material advisor last made a tax statement relating to the transaction. Sec- tion 6112(b)(1)(b); Reg. 301.6112-1(d).
35 Section 6707(a).
36 Sections 6707(a) and (b)(1).
37 Section 6707(b)(2).
38 Section 6707(b)(2) (flush language). 39 Id.
40 Section 6501(a); CCA 201047022; internal Revenue Manual (iRM) 4.32.2.11.6.1.
The exercise of ordinary business care also may constitute reasonable cause, i.e., that the material advisor “established, and adhered to, proce- dures reasonably designed and im- plemented to ensure compliance with” the list maintenance requirements.”53 Like other delinquency penalties, the material advisor must show that it took immediate steps to correct any noncompliance, and the failure to do so will weigh against a finding that the advisor exercised ordinary busi- ness care.54
Another ground of reasonable cause is the occurrence of a super- vening event beyond the person’s control, such as fire, flood, storm, or other casualty; illness; theft; or other unexpected event that damages or impairs the person’s business records or records management system.55 A supervening event establishes reason- able cause for only the period that “a person who exercised ordinary busi- ness care would need to provide the list from alternative records in exis- tence, or make the list available, under the specific facts and circumstances.”56
Reliance on an independent tax professional’s advice also may estab- lish reasonable cause as long as the reliance was reasonable and in good faith, and the advice was received prior to the deadline for the list.57 The advice must be at a level of “more likely than not” certainty from an in- dependent tax professional, i.e., a per- son who is not also a material advisor on the transaction, or if the transac-
41 Reg. 301.6707-1(b)(2).
42 Reg. 301.6707-1(e)(vi).
43 Sections 6707(c) and 6707A(d)(1).
44 Reg. 301.6707-1(e); Rev. Proc. 2007-21, 2007-1 Cb 613.
45 Section 6708(a)(1); Reg. 301.6708-1(a) & (b).
46 Section 6708(b).
47 116 AfTR2d 2015-6413 (DC uT, 2015).
48 See Civil Docket for Case no. 2:14-cv-00919-TC (D. utah), Document no. 68, Stipulation of Dismissal Pur- suant to Fed. R. Civ. P. 41(a) (11/18/16).
49 Reg.301.6708-1(c)(3)(i).
50 Reg. 301.6708-1(c)(3)(iii).
51 Section 6708(a)(2); Reg. 301.6708-1(g). 52 Reg. 301.6708-1(g)(2).
53 Reg. 301.6708-1(g)(3).
54 Id.
55 Reg. 301.6708-1(g)(4).
56 Id.
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