New Material Adviser Reporting Rules

By Alistair M. Nevius, J.D.

The IRS has issued proposed regulations relating to the reporting rules for material advisers (REG-160872-04). Sec. 6707 contains penalty provisions for failure to timely file a return under Sec. 6111(a) or for filing a false or incomplete return with respect to a reportable transaction. For reportable transactions other than listed transactions, the Sec. 6707 penalty is $50,000; for listed transactions, the penalty is the greater of $200,000 or 50% of the gross income the material adviser makes from providing advice on the transactions (75% if the failure was intentional).

The proposed regulations clarify that the IRS can assess the Sec. 6707 penalty against each material adviser who is required to file a return under Sec. 6111, even if multiple material advisers have a duty to file under the same transaction.

Under the proposed regulations, a material adviser will not be considered to have filed an incomplete Form 8918, Material Advisor Disclosure Statement, if he or she completes the form to the best of his or her ability and knowledge after exercising reasonable efforts to obtain the required information. However, a Form 8918 will be considered intentionally incomplete and subject to the increased Sec. 6707 penalty if it omits information required to be provided under the regulations and contains a statement that the omitted information will be provided upon request.

The proposed regulations give material advisers an opportunity to correct problems with Form 8918 by filing a “true and complete” return with the IRS before the earlier of the date that any taxpayer files a Form 8886, Reportable Transaction Disclosure Statement, identifying the material adviser with respect to the reportable transaction in question, or the date the IRS contacts the material adviser concerning the reportable transaction.

The proposed regulations would be effective when finalized.


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