Reportable Transaction Penalty Gets Final Regulations

The IRS issued final regulations (T.D. 9550), governing the Sec. 6707A penalty regime for failure to report reportable transactions, to reflect changes made by the Small Business Jobs Act of 2010 (P.L. 111-240). However, the final regulations do not give guidance on how the amount of the penalty is computed. The IRS said it is aware of questions that have been raised in that regard and expects to issue further guidance later, for which it invited public comments.

As amended by the Small Business Jobs Act, Sec. 6707A imposes a penalty for failing to report on any return or statement any reportable transaction (a transaction the IRS determines has a potential for tax avoidance or evasion, including listed transactions). The penalty is 75% of any decrease in tax shown on the return (or that would have resulted if the transaction had been respected for federal tax purposes), with different minimum and maximum penalty amounts set for reportable and listed transactions.

Before amendment by the Small Business Jobs Act, Sec. 6707A had prescribed specific fixed-dollar penalty amounts for reportable and listed transactions without reference to any percentage of tax benefit, so the penalty could exceed the tax benefit from the transaction.

The final regulations revise and replace temporary and proposed regulations (T.D. 9425 and REG-160868-04) issued in 2008. They remove, as obsolete, provisions in the proposed regulations concerning factors the IRS would weigh in determining whether to grant a rescission of the penalty for a reportable transaction (other than a listed transaction) under Sec. 6707A(d). In the final regulations’ preamble, the IRS said the proposed rescission rules had been intended to address situations where the penalty was disproportionately larger than the associated tax benefit—a matter the statutory amendments now address.

The final regulations also change the treatment of a failure to disclose certain penalties in SEC filings (required by Sec. 6707(e)). Under the regulations, the Sec. 6707(e) penalty for failure to disclose will be rescinded if the IRS rescinds in full the underlying Sec. 6707A penalty.

The final regulations are effective September 7, 2011.