Page 80 - JoFA_2022

TAX

A taxpayer may submit a return has at least a realistic possibility of being
sustained on its merits (SSTS No. 1, Tax Return
request to the IRS for a ruling Positions, Statement 5.a). Otherwise, members
may recommend a tax position or sign a return
whether a transaction is subject reflecting it if the position has a “reasonable
basis” and is appropriately disclosed (SSTS No.
1, Statement 5.b).
to these reporting/disclosure ■ In determining whether the reporting and
disclosure standards are met, the member should
requirements. consider whether a listed or reportable transac-
tion is involved (SSTS Interpretation No. 1-1,
Reporting and Disclosure Standards, General
Interpretation 11.6).
requested to do so may be subject to a penalty ■ The reason or reasons why this transaction must
(Sec. 6708(a)). Material advisers who fail to file a be disclosed: listed, confidential, contractual pro-
correct and complete Form 8918 by the due date tection, loss, and/or transaction of interest (Form
also may be subject to a penalty (Sec. 6707; Regs. 8886, line 2, “Identify the Type of Reportable
Sec. 301.6707-1). Transaction”).
Other ethical requirements may also come into ■ A failure to disclose may be subject to a penalty
play for tax practitioners, including Treasury Cir- of 75% of the decrease in the tax shown on the
cular 230, Regulations Governing Practice Before the return (Sec. 6707A(b)(1)).
Internal Revenue Service (31 C.F.R. Part 10), and,
for AICPA members, the Statements on Standards PLAYING IT SAFE WITH A RULING REQUEST
for Tax Services (SSTSs). A taxpayer may submit a request to the IRS for
a ruling whether a transaction is subject to these
Example reporting/disclosure requirements. The request
B and J are an ultrawealthy couple who have nearly should be submitted on or before the date that
$50 million in capital gains and ordinary income disclosure would otherwise be required. However,
each year. They are contacted by a tax strategy the potential obligation to report/disclose is not
promoter who offers a loss-generating tax strategy suspended during the period that the request is
to offset their gains and income. Before they are pending. The IRS determines whether the ruling
allowed to hear the specifics of the strategy, they request itself satisfies the disclosure requirement
must sign a confidentiality and nondisclosure (Regs. Sec. 1.6011-4(f)(1)). A taxpayer may make a
agreement. The promoter then explains that this is protective disclosure by following the requirements
a loss-generating trading strategy involving equities of this rule. To qualify, the disclosure statement
and foreign currency in a flowthrough entity (S cor- should indicate that the taxpayer is uncertain
poration) supported by a more-likely-than-not tax whether the transaction is required to be reported/
opinion from a reputable law firm. The gains go to disclosed and that the statement is being filed on a
the traders, while the losses are left to flow through protective basis (Regs. Sec. 1.6011-4(f)(2)).
to the taxpayers on Schedule E, Supplemental Income In addition, a taxpayer may request a ruling on
and Loss, of their Form 1040, U.S. Individual Income the merits of a transaction. If this is done on or
Tax Return, where most of their income is shown. before the date that disclosure/reporting would
The losses generated will be 10 times the level of otherwise be required and the taxpayer receives a
their investment, and their investment is contractu- favorable ruling as to the transaction, the disclosure
ally protected along with the agreed-upon losses. rules are deemed to have been satisfied by the
The promoter’s fee is 3% of the amount of capital taxpayer with regard to that transaction, so long as
loss generated and 5% of the amount of ordinary the request fully discloses all relevant facts relating
loss generated. Their CPA conditions his approval to the transaction that would otherwise be required
and signature on their tax return on disclosing the to be disclosed (Regs. Sec. 1.6011-4(f)(1)).
strategy and provides the following reasons:
■ Unless the applicable taxing authority imposes a CONFIDENTIALITY PRIVILEGE
higher standard, AICPA members must have a The privilege of confidentiality under Sec. 7525(a)(1)
good-faith belief that the position taken on a tax applicable to communications between tax

28 | Journal of Accountancy February 2022