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practitioners and taxpayers does not apply to penalty for establishing refund suit jurisdiction.
written communications regarding tax shelters Thus, a taxpayer assessed with the penalty need only
(Sec. 7525(b)). Thus, given the reportable transac- pay the divisible amount of the penalty attributable
tion regime, tax shelter participants cannot have a to a single day, or $10,000, before instituting a tax
reasonable expectation that their identities or their refund suit under Sec. 7422 (Chief Counsel Advice
participation in tax shelters will be confidential. 200646016).
The IRS and state tax officials have established
a nationwide partnership to combat abusive Promoting abusive tax shelters
tax avoidance — the Abusive Tax Avoidance A person who organizes, assists in organizing, or
Transactions Program. Under agreements with participates in the sale of any interest in a partner-
individual states, the IRS and states share informa- ship or other entity, or any plan or arrangement
tion on abusive tax-avoidance transactions and (i.e., an abusive tax shelter), is subject to a penalty if
their participants. he or she makes, furnishes, or causes another person
to make or furnish:
PENALTIES ■ A statement concerning the allowability of any
Taxpayers who fail to disclose may be subject tax benefit obtained through participation in the
to civil penalties. A separate penalty applies to tax shelter that the person knows or has reason
taxpayers who fail to include on any return or to know is materially false or fraudulent; or
statement any information with respect to a re- ■ A gross valuation overstatement concerning
portable transaction that is required to be included any matter material to the tax shelter
under Sec. 6011 (Sec. 6707A(a)). The penalty is (Sec. 6700(a)(2)).
equal to 75% of the decrease in tax shown on the The penalty is $1,000 or, if the person can
return as a result of the transaction or that would establish that it is less, 100% (50% for allowability
have resulted if the transaction were respected statements) of the gross income derived by the
for federal tax purposes (Sec. 6707A(b)(1); Regs. person from the activity related to the entity, plan,
Sec. 301.6707A-1(a)). The minimum penalty or arrangement (Sec. 6700(a)(2)). Persons subject
is $10,000, or $5,000 for natural persons (Sec. to the penalty include not only the promoter of a
6707A(b)(3)). The maximum amounts for listed tax shelter but also any other person who organizes
transactions are $200,000, or $100,000 for natural (or assists in the organization of) or sells (directly
persons, and for all other reportable transactions, or indirectly) a plan or arrangement and makes (or
$50,000, or $10,000 for natural persons. The IRS causes someone else to make) a material misrep-
can assess a Sec. 6707A penalty for failure to file resentation of the tax benefits to be derived from
Form 8886 or for filing one that fails to include participation in the plan or arrangement or makes
all required information and attachments or that a gross valuation overstatement as to any matter.
contains incorrect information. The gross valuation overstatement can be made
The penalty on material advisers is imposed if knowingly or unknowingly (see Humphrey, No.
the material adviser fails to file the required return 1:11-cv-1647 (D. Ga. 3/5/13)). The penalty can
on or before the date it is due or files a false or be applied even if the purchaser of the tax shelter
incomplete information return (Sec. 6707). The does not rely on it or does not underreport income
penalty may be assessed against each material tax. The penalty may be imposed on the tax shelter
adviser required to file Form 8918. Thus, if more entity, with the result that the penalty can become
than one material adviser is responsible for filing a the obligation of the participating members of
return for the same reportable transaction, a sepa- passthrough entities.
rate penalty may be assessed against each material
adviser who fails to file the return timely or files the ABLE TO WITHSTAND SCRUTINY
return with false or incomplete information (Regs. There is nothing wrong with aggressive tax plan-
Sec. 301.6707-1(c)(2)). ning. However, when a transaction must be cloaked
The penalty for failure to maintain and make a in secrecy to avoid an IRS challenge, taxpayers must
list of advisees with respect to a reportable transac- know something is wrong. Tax transactions that
tion available to the IRS is $10,000 per day of each are “too good to be true” may be reportable, and
failure after the 20th business day after the date disclosure protocols must be followed to avoid the
of the request (Sec. 6708(a)). The penalty for the associated penalties. Knowing the rules in this area
failure to maintain lists of advisees is a divisible may avoid pitfalls. ■

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