Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has issued proposed regulations under Code Sec. 6707 concerning the failure of material advisors to timely file a return or filing a return with false or incomplete information regarding reportable transactions under
Code Sec. 6111. The regulations are proposed to apply to a return the due date of which is after the date a final version of the regulations is published in the Federal Register.

Disclosure Requirement

  Under Code Sec. 6111, each material advisor is required to timely file an information return with respect to a reportable transaction (including a listed transaction). A material advisor is any person who provides any material aid, assistance, or advice with respect to the reportable transaction, as well as any individual who receives (directly or indirectly) a certain threshold of gross income from the transaction. The threshold is $50,000 in the case of a reportable transaction with substantially all tax benefits provided to a natural person ($10,000 in the case of a listed transaction). The threshold is increased to $250,000 in any other case ($25,000 in the case of a listed transaction).

  Form 8918, Material Advisor Disclosure Statement, is used by the material advisor to make the disclosure. Generally, the return must be filed by the last day of the month that follows the end of the calendar quarter in which the person became a material advisor. To be considered complete, the information disclosed must meet the requirements of Reg. §301.6111-3. A penalty is imposed under Code Sec. 6707 on any material advisor who fails to timely file the return or files a false of incomplete return under Code Sec. 6111. The penalty with respect to any reportable transaction other than a listed transaction is $50,000. For a listed transaction, the penalty is the greater of $200,000 or 50 percent of the gross income derived by the material advisor with respect to the transaction before the return is filed. In the case of a failure or action with respect to a listed transaction that is intentional, the penalty is the greater of $200,000 or 75 percent of the gross income derived by the material advisor with respect to the transaction before the return is filed.

Liability for Penalty

  Under the newly issued proposed regulations, the penalty may be assessed against each material advisor required to file Form 8918. Thus, if more than one material advisor is responsible for filing a return with respect to the same reportable transaction, a separate penalty may be assessed under Code Sec. 6707 against each material advisor who fails to file the return timely or files the return with false or incomplete information. In addition, if a group of material advisors enter into an agreement designating one material advisor to file the required return on behalf of all parties to the agreement, then the penalty may still be imposed on each party to the agreement if the designated material advisor fails to timely file the return or files the return with false or incomplete information.

Intentional Failures

  In the case of listed transactions, material advisors are considered to have acted intentionally, subjecting them to an increased penalty, if they knew of the obligation to file a return under Code Sec. 6111, and knowingly did not timely file a return with the IRS or filed a return knowing that it was false or incomplete. Thus, in the case of a material advisor under designation agreement, a nondesignated material advisor of the agreement will not be considered to have intentionally failed to meet the requirements of
Code Sec. 6111 unless the nondesignated material advisor knew or should have known that the designated material advisor would fail to timely file a true and complete return.

  Moreover, to encourage material advisors to correct material defects, the proposed regulations provide that any failure to file a timely return or filing a return with false or incomplete information will be considered unintentional if the material advisor remedies the failure by filing a true and complete return with the IRS prior to the earlier of the date that: (1) any taxpayer files Form 8886 identifying the material advisor with respect to the reportable transaction in question; or (2) the IRS contacts the material advisor concerning the reportable transaction.

False or Incomplete Information

  A return is considered to contain false information if any information on the return is untrue or incorrect when Form 8918 is filed. Information will not be considered false if it contains untrue or incorrect information by mistake or accident after the exercise of reasonable care by the material advisor or the information is immaterial. Incomplete information on a return means that the return does not provide the information required under Reg. §301.6111-3. A return will not be considered incomplete when the required information not provided is immaterial or was not provided due to mistake or accident after the exercise of reasonable care.

  In addition, material advisors who complete Form 8918 to the best of their ability and knowledge after the exercise of reasonable efforts to obtain the information will not be considered to have filed an incomplete return. However, in the case of a listed transaction, a Form 8918 will be considered intentionally incomplete and subject to an increased penalty if information required to be provided under Reg. §301.6111-3 is omitted and the form contains a statement that the omitted information will be provided upon request.

Rescission of Penalty

  Finally, the proposed regulations restate the procedures described in Rev. Proc. 2007-21, I.R.B. 2007-9, 613, for a material advisor to request a rescission of all or a portion of a penalty assessed under Code Sec. 6707 including: the deadline by which a person must request rescission; the information the person must provide in the rescission request; the factors that weigh in favor of and against granting rescission; where the person must submit the rescission request; and the rules governing requests for additional information from the person requesting rescission.

  The regulations note that the factors that weigh in favor of or against rescission do not represent an exclusive list, and no single factor will be determinative. Rather, all factors will be considered whether included in the list or not. However, the IRS will not take into consideration doubt as to liability for, or collectibility of, the penalty. In addition, the extent to which the penalty assessed is disproportionately larger than the tax benefit received will not be considered. The gross income threshold to be considered a material advisor ensures that any penalty imposed will not be disproportionate to the benefit received.

Comments

  Written or electronic comments and requests for a public hearing regarding the proposed regulations must be received by March 23, 2009.

Proposed Regulations, NPRM REG-160872-04, 2009FED ¶49,409

Other References:

 
Code Sec. 6707

  CCH Reference - 2008FED ¶40,086E

  Tax Research Consultant

  CCH Reference - TRC PENALTY: 3,252
CCH Reference - TRC PENALTY: 3,254