Janice Eiseman
Janice Eiseman

Information Returns: Importance of Timely Filing

Harsh penalties under Code Section 6707A for failure to file Form 8886 — Reportable Transaction Disclosure Form.

September 21, 2009
by Janice Eiseman, JD/LLM

Long gone are the days when tax advisors only had to think about filing income tax returns. Now, tax advisors must think about the timely filing of a multitude of information returns in addition to income tax returns. In some cases, failure to timely file an information return can have draconian results. A particularly good example of the dire consequences of failure to timely file an information return is illustrated by the failure to file Form 8886, Reportable Transaction Disclosure Statement.

“Reportable transactions” are defined in Treasury Regulation § 1.6011-4(b). Presently, there are five types of “reportable transactions”:

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

Each taxpayer, who participates (as defined in Treasury Regulation § 1.6011-4(c)(3)) in a reportable transaction, is required to File 8886.

The timely filing of Form 8886 is extremely important as the example discussed below illustrates. It is possible that the Internal Revenue Service (IRS) will assess the Section 6707A penalty if the Form 8886 is not timely filed. The Instructions to Form 8886 state that the taxpayer must attach a Form 8886 to the income tax return or information return, including amended returns, for each tax year in which the taxpayer participated in a reportable transaction. Furthermore, in the initial year that Form 8886 is filed, a copy must be sent to the Office of Tax Shelter Analysis (“OTSA”) at the time it is filed with the tax return. If a transaction becomes a listed transaction or a transaction of interest after the tax return has been filed reflecting participation in the transaction and before the end of the period of limitations for assessment, the taxpayer must file Form 8886 with the OTSA within 90 days of the transaction becoming a listed transaction or a transaction of interest.

The Instructions do not state that, in fact, there are different filing deadlines for listed transactions entered into before August 3, 2007. For these transactions, the filing deadline is the “next filed tax return” after the transaction becomes a listed transaction. See Treasury Decision 9046 for transactions entered into on or after February 28, 2003 and prior to August 3, 2007.

The penalty for failure to file Form 8886 is set forth in Code Section 6707A. It is, indeed, severe. If the type of reportable transaction is a “listed transaction,” the penalty is $100,000 in the case of a natural person, and $200,000 in any other case. If the type of reportable transaction is other than a listed transaction, the penalty is $10,000 in the case of a natural person, and $50,000 in any other case. The penalty is in addition to any other potentially applicable penalties, including accuracy-related penalties under Code Sections 6662 and 6662A. Furthermore, the penalty will be imposed regardless of whether the transaction results in an underpayment of tax. Notice 2005-11, 2005-1 C.B. 493.

Not only is the penalty determined without regard to tax owing, the statute does not provide for a “reasonable cause” provision for failure to file. In the case of a “listed transaction,” there is absolutely no mechanism to reduce the penalty once it has been assessed. If the reportable transaction is not a “listed transaction”, then the Commissioner (or his delegate) has authority to rescind all or any portion of the penalty provided that rescission would promote compliance with the Code and effective tax administration. His decision regarding rescission cannot be reviewed in any judicial proceeding. I.R.C. § 6707A(d). In Revenue Procedure 2007-21, 2007-1 C.B. 613 and Treasury Regulation Section 301.6707A-1T(d) (effective for Forms 8886 due after September 11, 2008), the IRS sets forth factors weighing in favor of rescission.

Problems of Applying Code Section 6707A

The following case illustrates the problems of applying Code Section 6707A.

An S corporation having one shareholder adopted a “Code Section 419(e) plan” in 2004. The corporation deducted amounts paid under the plan in 2004 and 2005. In Notice 2007-83, 2007-45 I.R.B. 960, released on October 17, 2007, the IRS identified the plan as a “listed transaction.” In Notice 2007-83, the IRS advised participants that they must file Form 8886 with the OTSA by January 15, 2008. The corporation and its shareholder were improperly advised regarding the requirement of each of them to file Form 8886; neither filed Form 8886 by January 15, 2008 nor attached Form 8826 to their respective 2008 income tax returns. An audit of the shareholder’s participation in the 419(e) plan began in January 2008 and was concluded in 2008 by the shareholder paying all of the deficiencies in 2004 and 2005 resulting from the listed transaction.

The IRS auditor abated the substantial understatement penalty and did not assess a Code Section 6707A penalty. Is it necessary for the S corporation and its shareholder to file Form 8886? If so, will the late filing cause a Code Section 6707A penalty to be assessed? If Form 8886 is not filed, the IRS could assess the Code Section 6707A penalty because of failure to file, and if it is filed, the IRS could assess the Code Section 6707A penalty because it was not timely filed. IRS personnel have indicated that even though they do not think the penalty should be applied in this case the statute may require them to assess the penalty regardless of whether Form 8886 is filed or not. The potential penalty would be $300,000: $200,000 for failure by the S corporation to file and $100,000 for failure by its shareholder to file.


Congress has recognized the problems raised by Code Section 6707A. In June, leading members of Congress wrote IRS Commissioner Douglas Shulman asking him to suspend efforts to collect Section 6707A penalties in cases where the annual tax benefits resulting from the listed transactions are less than $100,000 for individuals and $200,000 for other cases while Congress acts to remedy the severe situations arising under the application of Section 6707A. In July, Commissioner Shulman responded to the congressmen stating that the IRS would suspend collection efforts in cases requested by the congressmen through September 30, 2009. Legislation has also been introduced to amend Code Section 6707A to amend its harsh penalty provisions. (H.R. 2143 introduced April 28, 2009.)

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Janice Eiseman, JD/LLM,is a principal at Cummings & Lockwood in Stamford, Conn. office where she focuses on the taxation of closely held businesses and tax planning for owners and investors. Eiseman has broad-based experience counseling clients on the formation, ownership and structuring of various business entities, as well as drafting and negotiating tax-based and transactional documentation for both individual and business clients. She has also done controversy work before the Internal Revenue Service and the New York State Department of Taxation and Finance. Prior to joining Cummings & Lockwood, she served as senior tax and benefits counsel at the law firm Morrison & Cohen LLP, in New York City.