misguidance in the proposed 6694 regulations

The following language appears in section 1.6694(b) of the proposed regulations:

The analysis prescribed by §1.6662-4(d)(3)(ii) (or any successor provision) for purposes of determining whether substantial authority is present applies for purposes of determining whether the more likely than not standard is satisfied. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer's diligence. In determining the level of diligence in a particular situation, the tax return preparer's experience with the area of Federal tax law and familiarity with the taxpayer's affairs, as well as the complexity of the issues and facts, will be taken into account

The above language would be applicable to the "substantial authority" standard in lieu of the "more than likely standard" under 6649(a)(2)(A) as amended by the Emergenchy Economic Stabilization Act of 2008.

Focus instead on the fact that the tax return preparers will still need to meet the "substantial authority" itemized in 1.6662-3(d)(3)(iii) as well as the "analysis" requirements of (d)(3)(ii). Those are serious technical requirements and standards at a very high technical threshold.

So what is this "facts & circumstances" "familiarity with family" and "due diligence" language and focus on "complexity?" Those are trap terms. If you do not have the requisite technical support, you will be a 6694 penalty victim. In the real world, the IRS examiners are going to take aggressive positions that your technical authority is deficient if it is not entirely comprehensive. On many occasions I find that the IRS examiners do not know or understand the relevant law. Getting them to understand current law is sometimes a miricle. The examiners are not tax attorneys good at technical nuances sufficient to evaluate "due diligence" "complexity" and "facts & circumstances." If the technical support is lacking, I would not expect the examiners to know when the return preparer is more than 40% or more than 30% on target with technical authority, or take into account complexity, or lack of experience as a return preparer.

I believe the drafters of the proposed regulations should put these terms and concepts under "reasonable cause" in section 1.6694-2(d) of the proposed regulations. In fact "complexity" is a concept that is used in determing "reasonable cause" in the IRM dealing with penalties and also under the case law. The same is true of the "facts & circumstances" test and "due diligence." I would hope that the IRS will use that terminology solely for determining "reasonable cause" in the final regulations.

My problem with the location of these terms under the standard of conduct part of the regulations is because these terms are misleading to return preparers. These terms are traps because they imply that return preparers need not have quality technical support under section 1.6662-4(d) of the regulations.

Example 1: return preparer "negligence." Forget about it. There is no technical authority and the penalty will be applied. The fact that the law is complex or that you exercised due diligence will not negate the penalty. Bet on it.

Example 2: no return preparer negligence, but an "employee" was treated as a "subcontractor." I do not care how much "due diligence" was execised or even if you just had a heart by-pass operation, you will get nailed with the penalty. Your only concern will be whether the $5,000 "reckless" penalty will be assessed.

Do not rely on "due diligence" or "facts & circumstances" or "complexity" to save you from 6694 penalties when your technical support is weak or lacking. These terms are traps to blind-sided return preparers to take positions without doing the homework necessary to determine if the positions are supported with "substantial authority." Futther, assume that you will be dealing with incompetent IRS examiners with little training and experience because that is often the case.

We are almost at the end of 2008 there has been very little guidance to return preparers by their professional associations on the need for technical analysis and technical authority. My advice: more authority is better than less technical support and it is better to disclose positions to the IRS for the reduced standards. You will have to allocate more time to return preparation for tax research and consultations with tax experts.

I have received excellent commentary sent to ab@irstaxattorney.com. But you can make comment to these blogs. No seminars will be offered in December.

6695 signature requrements and penalty

This blog provides information on the 6695(b) failure to sign a return penalty and the IRS electronic signature procedures. Although this penalty has been largely ignored, it will be ignored no longer given the interest of the IRS in the 6694 penalties and the severity of those penalties. It is likely that the 6694(b) $5,000 penalty for reckless conduct will take into account the failure to sign a tax return. I have seen the IRS treat the failure to sign as one of the important facts taken into consideration in criminal fraud examinations of return preparers. Under the current 6694 regulations, you cannot avoid the 6694 penalty by not signing the tax return. If you have any issues on that point, please send an e-mail to ab@irstaxattorney.com

6695(b) FAILURE TO SIGN RETURN. --Any person who is a tax return preparer with respect to any return or claim for refund, who is required by regulations prescribed by the Secretary to sign such return or claim, and who fails to comply with such regulations with respect to such return or claim shall pay a penalty of $50 for such failure, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The maximum penalty imposed under this subsection on any person with respect to documents filed during any calendar year shall not exceed $25,000.



A tax return preparer who fails to sign a return or a refund claim before it is presented to the taxpayer for signature is subject to a $50 penalty for each such failure (Code Sec. 6695(b), as amended by the Small Business Tax Act of 2007 (P.L. 110-28) and Reg. §1.6695-1(b)). The regulations no longer require a manual signature. Return preparers may provide copies of returns for recordkeeping purposes without a manual signature, as long as the return copies are in an electronic or digital format prescribed by the IRS.

If more than one preparer is involved in the preparation of the return or claim for refund, the individual preparer with the primary responsibility for the overall accuracy of the preparation of the return or claim for refund must sign it, not another individual who may be responsible for its mathematical accuracy (Reg. §1.6695-1(b)(2)).

A substitute preparer may sign a return or refund claim when the original preparer is unavailable if the substitute preparer first reviews the information obtained by the original preparer and also reviews the original preparer's preparation of the return or refund claim (Reg. §1.6695-1(b)(1)).

The IRS is required to develop procedures for the acceptance of signatures in digital or other electronic form, effective July 22, 1998 (Code Sec. 6061(b)). Until such procedures are in place, the IRS is authorized to:
(1) waive the signature requirement for designated documents or returns; or

(2) provide for alternative signing methods.
Interim guidance regarding tax preparer signature requirement. Interim guidance has been issued for returns and claims for refund filed after December 31, 2007 identifying which returns and claims for refunds are required to be signed by a tax return preparer in order to avoid the Code Sec. 6695(b) penalty. The tax return preparer must sign the return or claim for refund after it is completed and before it is presented to the taxpayer for signature. If the preparer is unavailable to sign the return or claim another tax preparer must review its entire preparation and sign it before presenting it to the taxpayer. If more than one tax return preparer is involved with preparing the return or refund claim, the preparer having primary responsibility for its overall substantive accuracy must sign it (Notice 2008-12, I.R.B. 2008-3, December 31, 2007.

Tax identification numbers required. A tax return preparer who is required to sign a return or refund claim must also provide his or her tax identification number (TIN). The identifying number of an individual return preparer is the individual's social security number (Reg. §1.6109-2(a)). An individual tax return preparer can elect to use an alternative to the social security number as an identifying number. The alternative number will be prescribed by the IRS in forms, instructions or other guidance (Code Sec. 6109(a)(4), as amended by P.L. 110-28; see also ¶39,965.04). A $50 penalty is also imposed on a tax return preparer who fails to inscribe his or her TIN.

If the return preparer is employed or engaged by someone else to prepare the return or if the preparer is a member of a partnership of two or more preparers, the identifying number of the employer or partnership must also be entered on the return or claim for refund. Failure to provide an employer's identifying number may result in the imposition of a $50 penalty for each such failure (Code Sec. 6695(c), as amended by P.L. 110-28 and Reg. §1.6695-1(c)). Both penalties are excused where the failure is due to reasonable cause and not to willful neglect. The maximum penalty imposed on any person with respect to documents filed during any calendar year will not exceed $25,000 for each penalty (Code Sec. 6695(b) and (c), as amended by P.L. 110-28).


Signing of Individual Returns: Electronic signatures

The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) requires the IRS to develop procedures for the acceptance of signatures in digital or other electronic form (Code Sec. 6061(b)). Until the procedures are in place, the IRS is authorized to: (1) waive the requirement of a signature for designated types or classes of returns, declarations, statements, or other documents or (2) provide for alternative methods of signing these items.

An alternative method of signature will be treated identically, for both civil and criminal purposes, as a signature on a paper form. The IRS must publish guidance to define and implement any signature waiver or alternative signature methods (Code Sec. 6061(b)(2) and Code Sec. 6061(b)(3)).

The IRS's e-file program allows taxpayers to file their returns electronically using an Authorized IRS e-file provider, a personal computer or, for those who are eligible, Free File. (The IRS announced that it would discontinue the TeleFile program (which allowed taxpayers to file their returns electronically using the telephone) after August 16, 2005 (Announcement 2005-26, 2005-1 CB 969)). Tax professionals accepted into the electronic filing program, called authorized IRS e-file Providers, are the electronic return originators (EROs) who transmit tax return information to the IRS. With respect to e-file signature alternatives, the Self-Select PIN Method allows individuals to electronically sign an e-file return by selecting a five-digit PIN. The Practitioner PIN Method is an e-file signature option for those who use an ERO. For more information on the IRS e-file program

The IRS will allow EROs to sign the following forms by rubber stamp, mechanical device (such as signature pen), or computer software program: Form 8453, U.S. Individual Income Tax Declaration for an IRS e-file Return; Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350; and Form 8879, IRS e-file Signature Authorization, for any Form 8453, Form 8878, or Form 8879 filed on or after October 15, 2007 (Notice 2007-79. These alternative methods of signing authorized in Notice 2007-79 must include either a facsimile of the individual ERO's signature or of the ERO's printed name. EROs using one of these alternative means are personally responsible for affixing their signatures to returns or requests for extension. Notice 2007-79 applies only to EROs that sign Form 8453, Form 8878, or Form 8879, and does not alter the signature requirements for any other type of document currently required to be manually signed, such as elections, applications for changes in accounting method, powers of attorney, or consent forms. It also does not alter the requirement that Form 8453, Form 8878, or Form 8879 be signed by the taxpayer making these forms by handwritten signature or other authorized means (Notice 2007-79).



Notice 2008-12 , I.R.B. 2008-3, December 31, 2007.

Penalties: Failure by preparer to sign return. --


This notice provides guidance to the public regarding implementation of the tax return preparer signature requirement penalty provisions under section 6695(b) of the Internal Revenue Code, as amended by the Small Business and Work Opportunity Tax Act of 2007.



BACKGROUND

The Small Business and Work Opportunity Tax Act of 2007 (the Act), Pub. L. No. 110-28, 121 Stat. 190, was enacted on May 25, 2007. Section 8246 of the Act amended several provisions of the Code, including section 6695(b), to extend the application of the income tax return preparer penalties to all tax return preparers. As amended by the Act, section 6695(b) imposes a penalty on a tax return preparer of any return or claim for refund who fails to sign a return when required by regulations prescribed by the Secretary, unless it is shown that the failure is due to reasonable cause and not due to willful neglect. The penalty under section 6695(b) is $50 for each failure to sign, with a maximum of $25,000 per person imposed with respect to each calendar year. The amendments to section 6695(b) made by section 8246 of the Act are effective for tax returns and claims for refund prepared after May 25, 2007.



INTERIM AND PLANNED GUIDANCE

The Treasury Department and the Internal Revenue Service intend to issue regulations that implement the signature requirements under section 6695(b) for certain 2008 tax year returns and claims for refund. In advance of these regulations, guidance is being issued to (1) identify the returns and claims for refund required to be signed by a tax return preparer in order to avoid a section 6695(b) penalty under current regulations, and (2) identify the returns and claims for refund that will be required to be signed by a tax return preparer in order to avoid a section 6695(b) penalty under future regulations published by the Treasury Department and IRS. This interim guidance will apply until further guidance is issued and tax return preparers may rely on the interim guidance in this notice.



A. Signing Tax Return Preparer

For purposes of section 6695(b), an individual who is a tax return preparer with respect to a return of tax or claim for refund of tax listed below in paragraph (B)(1) of this notice shall sign the return or claim for refund after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature. If the tax return preparer is unavailable for signature, another tax return preparer shall review the entire preparation of the return or claim for refund, and then shall sign the return or claim for refund.

If more than one tax return preparer is involved in the preparation of the return or claim for refund, the individual tax return preparer who has the primary responsibility as between or among the preparers for the overall substantive accuracy of the preparation of such return or claim for refund shall be considered to be the tax return preparer for purposes of section 6695(b).



B. Forms Requiring Signature of Tax Return Preparer

(1) Consistent with existing regulations, in order to avoid the imposition of a penalty under section 6695(b), a signing tax return preparer described above in paragraph (A) of this notice must provide a signature on any income tax returns or claim for refund of income tax that are filed after December 31, 2007, including but not limited to the following:
 Form 990-T, Exempt Organization Business Income Tax Return

 Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation

 Form 1040, U.S. Individual Income Tax Return

 Form 1040A, U.S. Individual Income Tax Return

 Form 1040-C, U.S. Departing Alien Income Tax Return

 Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents

 Form 1040NR, U.S. Nonresident Alien Income Tax Return

 Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents

 Form 1040-PR, Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia (Incluyendo el Crédito Tributario Adicional por Hijos para Residentes Bona fide de Puerto Rico)

 Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)

 Form 1040X, Amended U.S. Individual Income Tax Return

 Form 1041, U.S. Income Tax Return for Estates and Trusts

 Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts

 Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts

 Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

 Form 1065, U.S. Return of Partnership Income

 Form 1065-B, U.S. Return of Income for Electing Large Partnerships

 Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return

 Form 1120, U.S. Corporation Income Tax Return

 Form 1120-C, U.S. Income Tax Return for Cooperative Associations

 Form 1120-F, U.S. Income Tax Return of a Foreign Corporation

 Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation

 Form 1120-H, U.S. Income Tax Return for Homeowners Associations

 Form 1120IC-DISC, Interest Charge Domestic International

 Sales Corporation Return

 Form 1120-L, U.S. Life Insurance Company Income Tax Return

 Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons

 Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return

 Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations

 Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts

 Form 1120-RIC, U.S. Income Tax Return For Regulated Investment Companies

 Form 1120S, U.S. Income Tax Return for an S Corporation

 Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B)

 Form 1120X, Amended U.S. Corporation Income Tax Return

 Form 2438, Undistributed Capital Gains Tax Return

(2) In the absence of Treasury regulations requiring signature, a signing tax return preparer described above in paragraph (A) of this notice will not be subject to the penalty under section 6695(b) with respect to tax returns or refund claims for taxes other than income taxes that are filed after December 31, 2007 but on or before December 31, 2008, including the filing of the following returns:
 Form CT-1, Employer's Annual Railroad Retirement Tax Return

 Form CT-2, Employee Representative's Quarterly Railroad Tax Return

 Form 11-C, Occupational Tax and Registration Return for Wagering

 Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return

 Form 706-A, United States Additional Estate Tax Return

 Form 706-D, United States Additional Estate Tax Return Under Code Section

 Form 706-GS(D), Generation-Skipping Transfer Tax Return For Distributions

 Form 706-GS(T), Generation-Skipping Transfer Tax Return For Terminations

 Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return - Estate of nonresident not a citizen of the United States Trusts

 Form 706-QDT, United States Estate Tax Return for Qualified Domestic Trusts

 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return

 Form 720, Quarterly Federal Excise Tax Return

 Form 720X, Amended Quarterly Federal Excise Tax Return

 Form 730, Monthly Tax Return for Wagers

 Form 843, Claim for Refund and Request for Abatement

 Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

 Form 940-PR, Planilla para la Declaración Federal ANUAL del Patrono de la Contribución Federal para el Desempleo (FUTA)

 Form 941, Employer's QUARTERLY Federal Tax Return

 Form 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono

 Form 941-SS, Employer's QUARTERLY Federal Tax Return

 Form 941-M, Employer's MONTHLY Federal Tax Return

 Form 943, Employer's Annual Federal Tax Return for Agricultural Employees

 Form 943(PR), Planilla Para la Declaración ANUAL De La Contribución Del Patrono De Empleados Agrícolas

 Form 944, Employer's ANNUAL Federal Tax Return

 Form 944-PR, Planilla para la Declaración ANUAL de la Contribución Federal del Patrono 944(SP), Declaración Federal ANUAL de Impuestos del Patrono o Empleador

 Form 944-SS, Employer's ANNUAL Federal Tax Return

 Form 945, Annual Return of Withheld Federal Income Tax

 Form 1040 (Schedule H), Household Employment Taxes

 Form 1040-PR (Anexo H-PR), Contribuciones sobre el Empleo de Empleados Domesticos

 Form 2290, Heavy Highway Vehicle Use Tax Return

 Form 2290(FR), Declaration d'Impot sur L'utilisation des Vehicules Lourds sur les Routes

 Form 2290(SP), Declaración del Impuesto sobre el Uso de Vehículos Pesados en las Carreteras

 Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code

 Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

 Form 8612, Return of Excise Tax on Undistributed Income of Real Estate Investment Trusts

 Form 8613, Return of Excise Tax on Undistributed Income of Regulated Investment Companies

 Form 8725, Excise Tax on Greenmail

 Form 8831, Excise Taxes on Excess Inclusions of REMIC Residual Interests

 Form 8849, Claim for Refund of Excise Taxes

 Form 8876, Excise Tax on Structured Settlement Factoring Transactions

 Form 8924, Excise Tax on Certain Transfers of Qualifying Geothermal or Mineral Interests

The tax return preparer shall sign the return in the manner prescribed by the Commissioner in forms, instructions, or other appropriate guidance.

The Treasury Department and IRS intend to issue regulations on or before December 31, 2008 requiring signatures under section 6695(b) for all the above listed forms that are filed after December 31, 2008.

Information on the preparer signature requirement for electronically filed returns will be announced in IRS publications, instructions, and information posted electronically on the IRS.gov website.



EFFECTIVE DATE

This Notice is effective as of January 1, 2008 .



CONTACT INFORMATION

The principal authors of this notice are Matthew S. Cooper and Michael E. Hara of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this notice contact Mr. Cooper at 202-622-4940 or Mr. Hara at (202) 622-4910 (not toll-free calls).


Notice 2007-79 , I.R.B. 2007-42, 809, October 15, 2007.

SECTION I. PURPOSE

This notice provides that the Internal Revenue Service will allow Electronic Return Originators (EROs) to sign the following forms by rubber stamp, mechanical device (such as signature pen), or computer software program: Form 8453, U.S. Individual Income Tax Declaration for an IRS e-file Return; Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350; and Form 8879, IRS e-file Signature Authorization.



SECTION 2. BACKGROUND

Section 6061 of the Internal Revenue Code and Treas. Reg. §1.6061-1(a) generally provide that any tax return, statement, or other document shall be signed in accordance with forms, instructions, or regulations prescribed by the Secretary. Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, sets forth the procedures for completing the Form 8453, Form 8878, and Form 8879. If providing the signature on a paper declaration, the taxpayer and the ERO (and the paid preparer if different from the ERO) must complete and sign the Form 8453 before the electronic data portion of the return is submitted. Taxpayers may wish to sign their returns electronically, but may choose to authorize their ERO to enter their Personal Identification Number (PIN) in the electronic return record by completing the appropriate IRS e-file signature authorization form. Form 8879 authorizes an ERO to enter PINs on Individual Income Tax Returns, and Form 8878 authorizes an ERO to enter PINs on Forms 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return; and Form 2350, Application for Extension of Time To File U.S. Income Tax Return.



SECTION 3. REQUIREMENTS FOR USE OF ALTERNATIVE METHODS OF SIGNING

The alternative methods of signing that this notice authorizes must include either a facsimile of the individual ERO's signature or of the ERO's printed name. EROs using one of these alternative means are personally responsible for affixing their signatures to returns or requests for extension.

This notice applies only to EROs that sign Form 8453, Form 8878, or Form 8879, and does not alter the signature requirements for any other type of document currently required to be manually signed, such as elections, applications for changes in accounting method, powers of attorney, or consent forms. In addition, this notice does not alter the requirement that Form 8453, Form 8878, or Form 8879 be signed by the taxpayer making these forms by handwritten signature or other authorized means.



SECTION 4. EFFECTIVE DATE

This notice applies to any Form 8453, Form 8878, or Form 8879 filed on or after October 15, 2007.



SECTION 5. DRAFTING INFORMATION

The principal author of this notice is Michael E. Hara of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, contact Michael E. Hara at (202) 622-4910 (not a toll-free call).



Rev. Proc. 2005-39 , I.R.B. 2005-28, 82, July 11, 2005.


SECTION 1. PURPOSE

This revenue procedure sets out the circumstances under which facsimile signatures may be used on (1) any form within the Form 94X series (including, but not limited to, Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return; Form 941, Employer's Quarterly Federal Tax Return; Form 943, Employer's Annual Federal Tax Return for Agricultural Employees; and Form 945, Annual Return of Withheld Federal Income Tax); (2) Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; (3) Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips; (4) Form CT-1, Employer's Annual Railroad Retirement Tax Return; or (5) any variant of these forms ( e.g., Form 941c, Supporting Statement to Correct Information; Form 941-SS, Employer's Quarterly Federal Tax Return).



SECTION 2. BACKGROUND

Section 6061(a) of the Internal Revenue Code generally provides that any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary.

Section 6061(b) authorizes the Secretary to develop procedures for the acceptance of signatures in digital or other electronic form. Section 6061(b)(1)(B) provides that the Secretary may provide for alternative methods of signing returns, declarations, statements, or other documents. Section 6061(b)(2) provides that, notwith-standing any other provision of law, any return, declaration, statement, or other document signed under an approved alternative method will be treated for all purposes as an original signature.

Section 31.6061-1 of the Regulations on Employment Taxes and Collection of Income Tax at Source provides that employment tax returns must be signed by:

(a) the individual, if the person required to make the return is an individual;

(b) the president, vice president, or other principal officer, if the person required to make the return is a corporation;

(c) a responsible and duly authorized member or officer having knowledge of its affairs, if the person required to make the return is a partnership or other unincorporated organization; or

(d) the fiduciary, if the person required to make the return is a trust or estate.

Returns may also be signed for the taxpayer by a duly authorized agent in accordance with section 31.6011(a)-7 of the regulations.

Section 31.6011(a)-7 provides that an employment tax return may be made by an agent in the name of the person required to make the return if an acceptable power of attorney is filed with the Service and if the return includes all taxes required to be reported by such person on such return for the period covered by the return.

Section 301.6061-1(b) of the Regulations on Procedure and Administration provides that the Secretary may prescribe in forms, instructions, or other appropriate guidance, the method of signing any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations.



SECTION 3. SCOPE AND APPLICATION

Corporate officers or duly authorized agents may sign any of the following forms by facsimile ( i.e., by rubber stamp, mechanical device, or computer software program): (1) the Form 94X series; (2) Form 1042; (3) Form 8027; (4) Form CT-1; or (5) any variant of such designated form ( e.g., Form 941c; Form 941-SS). Officers or agents using a facsimile means of signature are personally responsible for ensuring that their facsimile signature is affixed to returns. The person filing the form must retain a letter, signed by the officer or agent authorized to sign the return, declaring under penalties of perjury that the facsimile signature appearing on the form is the signature adopted by the officer or agent and that the facsimile signature was affixed to the form by the officer or agent or at his or her direction. The letter must list each return by name and identifying number. The letter should not be sent to the Internal Revenue Service unless specifically requested by the Service. The letter shall be maintained for at least four years after the due date of such tax as the return relates, or the date such tax is paid, whichever is later.



SECTION 4. EFFECT ON OTHER DOCUMENTS

Rev. Rul. 82-29, 1982-1 C.B. 200, is modified to add the forms designated above to the list of forms for which facsimile signatures are accepted by the Service. Rev. Rul. 82-29 is clarified as to the definition of facsimile signature, and is modified to delete the requirement that each group of returns forwarded to the Internal Revenue Service be accompanied by a list of such returns and a letter, signed by the person authorized to sign the returns, adopting the signature on the returns.



SECTION 5. EFFECTIVE DATE

This revenue procedure is effective for any of the designated forms filed with the Internal Revenue Service on or after July 1, 2005.



SECTION 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Richard Charles Grosenick of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Richard Charles Grosenick at (202) 622-7950 (not a toll-free call).

Signing of Individual Returns: Electronic signatures

The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) requires the IRS to develop procedures for the acceptance of signatures in digital or other electronic form (Code Sec. 6061(b)). Until the procedures are in place, the IRS is authorized to: (1) waive the requirement of a signature for designated types or classes of returns, declarations, statements, or other documents or (2) provide for alternative methods of signing these items (see for example Notice 2000-19 and Rev. Proc. 2005-39.

An alternative method of signature will be treated identically, for both civil and criminal purposes, as a signature on a paper form. The IRS must publish guidance to define and implement any signature waiver or alternative signature methods (Code Sec. 6061(b)(2) and Code Sec. 6061(b)(3)).

The IRS's e-file program allows taxpayers to file their returns electronically using an Authorized IRS e-file provider, a personal computer or, for those who are eligible, Free File. (The IRS announced that it would discontinue the TeleFile program (which allowed taxpayers to file their returns electronically using the telephone) after August 16, 2005 (Announcement 2005-26, 2005-1 CB 969)). Tax professionals accepted into the electronic filing program, called authorized IRS e-file Providers, are the electronic return originators (EROs) who transmit tax return information to the IRS. With respect to e-file signature alternatives, the Self-Select PIN Method allows individuals to electronically sign an e-file return by selecting a five-digit PIN. The Practitioner PIN Method is an e-file signature option for those who use an ERO. For more information on the IRS e-file program.

The IRS will allow EROs to sign the following forms by rubber stamp, mechanical device (such as signature pen), or computer software program: Form 8453, U.S. Individual Income Tax Declaration for an IRS e-file Return; Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350; and Form 8879, IRS e-file Signature Authorization, for any Form 8453, Form 8878, or Form 8879 filed on or after October 15, 2007 (Notice 2007-79,. These alternative methods of signing authorized in Notice 2007-79 must include either a facsimile of the individual ERO's signature or of the ERO's printed name. EROs using one of these alternative means are personally responsible for affixing their signatures to returns or requests for extension. Notice 2007-79 applies only to EROs that sign Form 8453, Form 8878, or Form 8879, and does not alter the signature requirements for any other type of document currently required to be manually signed, such as elections, applications for changes in accounting method, powers of attorney, or consent forms. It also does not alter the requirement that Form 8453, Form 8878, or Form 8879 be signed by the taxpayer making these forms by handwritten signature or other authorized means (Notice 2007-79).




Cumulative Bulletin Notice 2000-19, 2000-1 CB 845 , March 13, 2000.

PURPOSE
This notice informs taxpayers that the Internal Revenue Service is temporarily waiving the signature requirement for Form SS-4, Application for Employer Identification Number, as authorized by §6061(b)(1)(A) of the Internal Revenue Code.



BACKGROUND
Section 6061(a) generally provides that any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations must be signed in accordance with forms or regulations prescribed by the Secretary of the Treasury.

Section 6061(b)(1) requires the Secretary to develop procedures for accepting signatures in digital or other electronic form. Until such time as these procedures are in place, §6061(b)(1)(A) authorizes the Secretary to waive the requirement of a signature for a particular type or class of return, declaration, statement, or other document required or permitted to be made under the Code.

Section 6061(b)(3) requires that the Secretary define and implement any waiver of the signature requirements through appropriate published guidance.

Section 6109(a) provides, in part, that when required by regulations, any person required to make a return, statement, or other document must include in such return, statement, or other document such identifying number as may be prescribed for securing proper identification of such person.

Section 301.6109-1(a)(1)(ii)(C) of the Regulations on Procedure and Administration provides that any person other than an individual (such as a corporation, partnership, nonprofit association, trust, estate, or similar nonindividual person) that is required to furnish a taxpayer identifying number must use an employer identification number (EIN).

Section 301.6109-1(d)(2)(i) provides that any person required to furnish an EIN must apply for one on Form SS-4. The form, together with any supplementary statement, must be prepared and filed in accordance with the form, accompanying instructions, and relevant regulations, and must set forth fully and clearly the requested data. Form SS-4 requires the applicant to sign the form and verify by a written declaration that it is made under penalties of perjury.

REASONS FOR SIGNATURE WAIVER FOR FORM SS-4

The Service is exploring methods of filing Form SS-4 other than on paper, such as magnetic media and other electronic means. As these alternative methods of filing Form SS-4 evolve, the Service intends to provide procedures for accepting signatures in digital or other electronic form. Until such time as these procedures are in place, the Service is waiving the requirement under §6061(a) that taxpayers sign Form SS-4. This waiver applies to Forms SS-4 currently filed on paper, as well as to Forms SS-4 that eventually may be filed through electronic means. However, because this waiver is only temporary, the Service does not intend to remove the signature line from the paper version of Form SS-4.



EFFECTIVE DATE
This Notice is effective for Forms SS-4 filed on or after March 13, 2000.



DRAFTING INFORMATION
The principal author of this notice is Andrew J. Keyso of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice contact Mr. Keyso at (202) 622-4910 (not a toll-free call).

6694 penalty - "should have known"

Section 1.6694(a)(1) references understatements of tax resulting from a position that the return preparer knew (or reasonably should have known).

The penalty will apply under 6694(a), as amended, even under the reduced standards if the return preparer "reasonably should have known" that the position taken would have resulted in any understatement of tax.

That term is a very dangerous standard for return preparers. It is my opinion that the IRS will conclude that the return preparer "reasonably should have known" everyting in the Internal Revenue Code and the published regulations under the Code.
But the list goes on: IRS published positions (e.g., notices, revenue rulings, revenue procedures). Those are obvious things the return preparer reasonably should know. I suspect this this comes as a wake up call for many of those reading this blog.

However, it gets worse. I believe the IRS will take the position that the return preparer should have known about long standing case law.

All of the above will flunk the "reasonable basis" and "substantial authority" standards where the obvious law is readily available from basic tax research and analysis.

Of course, these issues do not arise if there is no understatement of tax. Without question, tax return preparers will have have the facility to research applicable tax law.

There is no doubt that this terminology will survive into the final 6694 regulations.

You can expect that the IRS examination software used by the IRS Service Centers will build in section 6694 for understatements of tax for tax returns prepared by return preparers for the 2008 tax year that will be filed in 2009. I expect the 6694 penalties to hit return preparers in 2009.

6707A possible applicaion to return preparers

As we all know, section 6694 deals with the responsibility of tax return preparer in preparing tax returns (e.g., 1040, 706, 1120, etc.) Section 6694 provides a penalty to return preparers for unreasonable positions (“content”) that is not adequately supported under tax law.

As a point of logic, if a return preparer has technical responsibility for the preparation of tax returns, why would the return preparer be responsible for some “content” (e.g. a technical position) and not other “content” such as “reportable transactions” and “listed transactions” as defined in section 6707A.

Section 6011 is the statute authorizing IRS reporting and information requirements. For this reason both “reportable transactions” and “listed transactions” reference section 6011.

Given the fact that “listed transactions” deal with defined tax avoidance transactions reported in a tax return, it would be strange in the extreme to take the position that the same return preparer, responsible for technical content, is not also responsible for the listed transaction in the same tax return.

Lastly, section 6707A(a) is expressly applicable to any “person who fails to include on any return or statement” the reportable or listed transactions. Section 7701(a)(1) defines the term “person” without reference to a “return preparer.” However, 7701(a)(1) includes an individual, a corporation, etc. and return preparers are individuals, corporations and similar entities. Note also that the language of 6707A elects to use the term “person” instead of the term “taxpayer.”

There is other opinion that return preparers are not included in the term “person” in section 6707A. Notwithstanding, there is no downside for return preparers to be alert to all IRS “reportable” and “listed” transactions. The $100,000 and $200,000 penalties should be enough for return preparers to play it safe and either report or stay away from these transactions.

1.6694-2 of the proposed regullations

Section 1.6694-2(b) provides, as follows:

(b) Reasonable belief that the position would more likely than not be sustained on its merits—

(1) In general. A tax return preparer may “reasonably believe that a position would more likely than not be sustained on its merits” if the tax return preparer analyzes the pertinent facts and authorities, and in reliance upon that analysis, reasonably concludes in good faith that the position has a greater than 50 percent likelihood of being sustained on its merits. In reaching this conclusion, the possibility that the position will not be challenged by the Internal Revenue Service (IRS) (for example, because the taxpayer’s return may not be audited or because the issue may not be raised on audit) is not to be taken into account. The analysis prescribed by §1.6662-4(d)(3)(ii) (or any successor provision) for purposes of determining whether substantial authority is present applies for purposes of determining whether the more likely than not standard is satisfied. Whether a tax return preparer meets this standard will be determined based upon all facts and circumstances, including the tax return preparer’s diligence. In determining the level of diligence in a particular situation, the tax return preparer’s experience with the area of Federal tax law and familiarity with the taxpayer’s affairs, as well as the complexity of the issues and facts, will be taken into account. A tax return preparer may reasonably believe that a position more likely than not would be sustained on its merits despite the absence of other types of authority if the position is supported by a well-reasoned construction of the applicable statutory provision. For purposes of determining whether the tax return preparer has a reasonable belief that the position would more likely than not be sustained on the merits, a tax return preparer may rely in good faith without verification upon information furnished by the taxpayer, advisor, other tax return preparer, or other party (including another advisor or tax return preparer at the tax return preparer’s firm), as provided in §1.6694-1(e).

(2) No unreasonable assumptions. A position must not be based on unreasonable factual or legal assumptions (including assumptions as to future events) and must not unreasonably rely on the representations, statements, findings, or agreements of the taxpayer or any other person. For example, a position must not be based on a representation or assumption that the tax return preparer knows, or has reason to know, is inaccurate.

Under section 6694(a)(2)(A) as amended, the "more likely than not standard" was replaced by the "substantial authority" standard of conduct.

For that reason, the final regulations will amend section 1.6694-2(b) to provide that the return preparer must have a reasonable belief that the position will be sutained on its merits with "substantial authority."

The quantitavie analysis required will be reduced from "greater than 50 percent" to most likely "greater than 40%. It is hard to see what difference that will make because the "more likely than not" sandard and the "substantial authority" standard are each subjective standards.

If a return preparer is "negligent" then the penalty will apply automatically because the "substantial authority" standard will apply even if the return preparer is not negligent. If a return preparer is "negligent" then the $5,000
reckless" penalty will likely apply. Why? Because the position taken in the return MUST NOT be based on a representation or assumption that the tax return preparer knows, or has reason to know, is inaccurate.

How can any return preparer have a client that is negligent and then be able to take the position that he "had no reason to know" that his client was negligent?

Suppose the 6662 20% penalty applies to a client because the client did not did not have the records required under section 6001. How can a return preparer claim that he or she had no reason to know that the client kept inadequate records to substantiate expenses and deductions? A few questions to a client should surface the quality of client's records. Reliance on taxpayer data does not mean that the return preparer can get away with asking basic questions about the quality of the data.

In short, every time the section 6662 penalty applies to a client, the return preparer will have to defend against an IRS accusation that the return preparer had reason to know that the taxpayer/client was negligent. The IRS is an aggressive organization on examination issues. You can fairly assume that the IRS will always argue "you had reason to know" and then cite the regulations as their authority for that qestion. Now that the "reckless" penalty is $5,000, what will stop the IRS from determining that the return preparer is "reckless" when the taxpayer client is negligent? Also, the IRS assessment of the return preparer on the 6694(b) $5,000 penalty will be presumed to be correct.

The solution is simple. Even though the proposed regulations say you can rely on information provided by your client, do not fall for that "trap." Return preparers will need to make sure that the taxpayer can support all of the data submitted to the return preparer. After that threshold is passed, the return preparer will have to make sure the positions taken meet the "substantial authority" standard.

Given the large size of the penalties, it would be foolish for return preparers to think that they can rely on statements furnished by their clients without verification. More work is involved, but then you can charge for that additional time needed to prepare tax returns. Schedule C data should always be closely verified.

The questions sent to ab@irstaxattorney have been helpful. Requests for seminars will not be considered for attendance less than 50.

6111 regulations dealing with disclosure issues

In the Prior Blog, the huge pernalties under section 6707A were identified dealing with "reportable transactions" and "listed transactions." The following regulations deal with some of the disclosure law. All return preparers need to be familiar with the 6111 regulations.

1.6011-4., Requirement of statement disclosing participation in certain transactions by taxpayers

(a) In general. --Every taxpayer that has participated, as described in paragraph (c)(3) of this section, in a reportable transaction within the meaning of paragraph (b) of this section and who is required to file a tax return must file within the time prescribed in paragraph (e) of this section a disclosure statement in the form prescribed by paragraph (d) of this section. The fact that a transaction is a reportable transaction shall not affect the legal determination of whether the taxpayer's treatment of the transaction is proper.

(b) Reportable transactions
(1) In general. --A reportable transaction is a transaction described in any of the paragraphs (b)(2) through (7) of this section. The term transaction includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and includes any series of steps carried out as part of a plan.
(2) Listed transactions. --A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.
(3) Confidential transactions
(i) In general. --A confidential transaction is a transaction that is offered to a taxpayer under conditions of confidentiality and for which the taxpayer has paid an advisor a minimum fee.
(ii) Conditions of confidentiality. --A transaction is considered to be offered to a taxpayer under conditions of confidentiality if the advisor who is paid the minimum fee places a limitation on disclosure by the taxpayer of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of that advisor's tax strategies. A transaction is treated as confidential even if the conditions of confidentiality are not legally binding on the taxpayer. A claim that a transaction is proprietary or exclusive is not treated as a limitation on disclosure if the advisor confirms to the taxpayer that there is no limitation on disclosure of the tax treatment or tax structure of the transaction.

(iii) Minimum fee. --For purposes of this paragraph (b)(3), the minimum fee is --

(A) $250,000 for a transaction if the taxpayer is a corporation;

(B) $50,000 for all other transactions unless the taxpayer is a partnership or trust, all of the owners or beneficiaries of which are corporations (looking through any partners or beneficiaries that are themselves partnerships or trusts), in which case the minimum fee is $250,000.

(iv) Determination of minimum fee. --For purposes of this paragraph (b)(3), in determining the minimum fee, all fees for a tax strategy or for services for advice (whether or not tax advice) or for the implementation of a transaction are taken into account. Fees include consideration in whatever form paid, whether in cash or in kind, for services to analyze the transaction (whether or not related to the tax consequences of the transaction), for services to implement the transaction, for services to document the transaction, and for services to prepare tax returns to the extent return preparation fees are unreasonable in light of the facts and circumstances. For purposes of this paragraph (b)(3), a taxpayer also is treated as paying fees to an advisor if the taxpayer knows or should know that the amount it pays will be paid indirectly to the advisor, such as through a referral fee or fee-sharing arrangement. A fee does not include amounts paid to a person, including an advisor, in that person's capacity as a party to the transaction. For example, a fee does not include reasonable charges for the use of capital or the sale or use of property. The IRS will scrutinize carefully all of the facts and circumstances in determining whether consideration received in connection with a confidential transaction constitutes fees.

(v) Related parties. --For purposes of this paragraph (b)(3), persons who bear a relationship to each other as described in section 267(b) or 707(b) will be treated as the same person.

(4) Transactions with contractual protection

(i) In general. --A transaction with contractual protection is a transaction for which the taxpayer or a related party (as described in section 267(b) or 707(b)) has the right to a full or partial refund of fees (as described in paragraph (b)(4)(ii) of this section) if all or part of the intended tax consequences from the transaction are not sustained. A transaction with contractual protection also is a transaction for which fees (as described in paragraph (b)(4)(ii) of this section) are contingent on the taxpayer's realization of tax benefits from the transaction. All the facts and circumstances relating to the transaction will be considered when determining whether a fee is refundable or contingent, including the right to reimbursements of amounts that the parties to the transaction have not designated as fees or any agreement to provide services without reasonable compensation.

(ii) Fees. --Paragraph (b)(4)(i) of this section only applies with respect to fees paid by or on behalf of the taxpayer or a related party to any person who makes or provides a statement, oral or written, to the taxpayer or related party (or for whose benefit a statement is made or provided to the taxpayer or related party) as to the potential tax consequences that may result from the transaction.

(iii) Exceptions

(A) Termination of transaction. --A transaction is not considered to have contractual protection solely because a party to the transaction has the right to terminate the transaction upon the happening of an event affecting the taxation of one or more parties to the transaction.

(B) Previously reported transaction. --If a person makes or provides a statement to a taxpayer as to the potential tax consequences that may result from a transaction only after the taxpayer has entered into the transaction and reported the consequences of the transaction on a filed tax return, and the person has not previously received fees from the taxpayer relating to the transaction, then any refundable or contingent fees are not taken into account in determining whether the transaction has contractual protection. This paragraph (b)(4) does not provide any substantive rules regarding when a person may charge refundable or contingent fees with respect to a transaction. See Circular 230, 31 CFR Part 10, for the regulations governing practice before the IRS.
(5) Loss transactions

(i) In general. --A loss transaction is any transaction resulting in the taxpayer claiming a loss under section 165 of at least --

(A) $10 million in any single taxable year or $20 million in any combination of taxable years for corporations;

(B) $10 million in any single taxable year or $20 million in any combination of taxable years for partnerships that have only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; or

(C) $2 million in any single taxable year or $4 million in any combination of taxable years for all other partnerships, whether or not any losses flow through to one or more partners;

(D) $2 million in any single taxable year or $4 million in any combination of taxable years for individuals, S corporations, or trusts, whether or not any losses flow through to one or more shareholders or beneficiaries; or

(E) $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss arises with respect to a section 988 transaction (as defined in section 988(c)(1) relating to foreign currency transactions).
(ii) Cumulative losses. --In determining whether a transaction results in a taxpayer claiming a loss that meets the threshold amounts over a combination of taxable years as described in paragraph (b)(5)(i) of this section, only losses claimed in the taxable year that the transaction is entered into and the five succeeding taxable years are combined.

(iii) Section 165 loss

(A) For purposes of this section, in determining the thresholds in paragraph (b)(5)(i) of this section, the amount of a section 165 loss is adjusted for any salvage value and for any insurance or other compensation received. See §1.165-1(c)(4). However, a section 165 loss does not take into account offsetting gains, or other income or limitations. For example, a section 165 loss does not take into account the limitation in section 165(d) (relating to wagering losses) or the limitations in sections 165(f), 1211, and 1212 (relating to capital losses). The full amount of a section 165 loss is taken into account for the year in which the loss is sustained, regardless of whether all or part of the loss enters into the computation of a net operating loss under section 172 or a net capital loss under section 1212 that is a carryback or carryover to another year. A section 165 loss does not include any portion of a loss, attributable to a capital loss carryback or carryover from another year, that is treated as a deemed capital loss under section 1212.

(B) For purposes of this section, a section 165 loss includes an amount deductible pursuant to a provision that treats a transaction as a sale or other disposition, or otherwise results in a deduction under section 165. A section 165 loss includes, for example, a loss resulting from a sale or exchange of a partnership interest under section 741 and a loss resulting from a section 988 transaction.

(6) Transactions of interest. --A transaction of interest is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest.

(7) [Reserved].

(8) Exceptions

(i) In general. --A transaction will not be considered a reportable transaction, or will be excluded from any individual category of reportable transaction under paragraphs (b)(3) through (7) of this section, if the Commissioner makes a determination by published guidance that the transaction is not subject to the reporting requirements of this section. The Commissioner may make a determination by individual letter ruling under paragraph (f) of this section that an individual letter ruling request on a specific transaction satisfies the reporting requirements of this section with regard to that transaction for the taxpayer who requests the individual letter ruling.

(ii) Special rule for RICs. --For purposes of this section, a regulated investment company (RIC) as defined in section 851 or an investment vehicle that is owned 95 percent or more by one or more RICs at all times during the course of the transaction is not required to disclose a transaction that is described in any of paragraphs (b)(3) through (5) and (b)(7) of this section unless the transaction is also a listed transaction or a transaction of interest.

(c) Definitions. --For purposes of this section, the following definitions apply:

(1) Taxpayer. --The term taxpayer means any person described in section 7701(a)(1), including S corporations. Except as otherwise specifically provided in this section, the term taxpayer also includes an affiliated group of corporations that joins in the filing of a consolidated return under section 1501.

(2) Corporation. --When used specifically in this section, the term corporation means an entity that is required to file a return for a taxable year on any 1120 series form, or successor form, excluding S corporations.
(3) Participation

(i) In general
(A) Listed transactions. --A taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under paragraph (b)(2) of this section. A taxpayer also has participated in a listed transaction if the taxpayer knows or has reason to know that the taxpayer's tax benefits are derived directly or indirectly from tax consequences or a tax strategy described in published guidance that lists a transaction under paragraph (b)(2) of this section. Published guidance may identify other types or classes of persons that will be treated as participants in a listed transaction. Published guidance also may identify types or classes of persons that will not be treated as participants in a listed transaction.

(B) Confidential transactions. --A taxpayer has participated in a confidential transaction if the taxpayer's tax return reflects a tax benefit from the transaction and the taxpayer's disclosure of the tax treatment or tax structure of the transaction is limited in the manner described in paragraph (b)(3) of this section. If a partnership's, S corporation's or trust's disclosure is limited, and the partner's, shareholder's, or beneficiary's disclosure is not limited, then the partnership, S corporation, or trust, and not the partner, shareholder, or beneficiary, has participated in the confidential transaction.

(C) Transactions with contractual protection. --A taxpayer has participated in a transaction with contractual protection if the taxpayer's tax return reflects a tax benefit from the transaction and, as described in paragraph (b)(4) of this section, the taxpayer has the right to the full or partial refund of fees or the fees are contingent. If a partnership, S corporation, or trust has the right to a full or partial refund of fees or has a contingent fee arrangement, and the partner, shareholder, or beneficiary does not individually have the right to the refund of fees or a contingent fee arrangement, then the partnership, S corporation, or trust, and not the partner, shareholder, or beneficiary, has participated in the transaction with contractual protection.

(D) Loss transactions. --A taxpayer has participated in a loss transaction if the taxpayer's tax return reflects a section 165 loss and the amount of the section 165 loss equals or exceeds the threshold amount applicable to the taxpayer as described in paragraph (b)(5)(i) of this section. If a taxpayer is a partner in a partnership, shareholder in an S corporation, or beneficiary of a trust and a section 165 loss as described in paragraph (b)(5) of this section flows through the entity to the taxpayer (disregarding netting at the entity level), the taxpayer has participated in a loss transaction if the taxpayer's tax return reflects a section 165 loss and the amount of the section 165 loss that flows through to the taxpayer equals or exceeds the threshold amounts applicable to the taxpayer as described in paragraph (b)(5)(i) of this section. For this purpose, a tax return is deemed to reflect the full amount of a section 165 loss described in paragraph (b)(5) of this section allocable to the taxpayer under this paragraph (c)(3)(i)(D), regardless of whether all or part of the loss enters into the computation of a net operating loss under section 172 or net capital loss under section 1212 that the taxpayer may carry back or carry over to another year.

(E) Transactions of interest. --A taxpayer has participated in a transaction of interest if the taxpayer is one of the types or classes of persons identified as participants in the transaction in the published guidance describing the transaction of interest.

(F) [Reserved].

(G) Shareholders of foreign corporations

(1) In general. --A reporting shareholder of a foreign corporation participates in a transaction described in paragraphs (b)(2) through (5) and (b)(7) of this section if the foreign corporation would be considered to participate in the transaction under the rules of this paragraph (c)(3) if it were a domestic corporation filing a tax return that reflects the items from the transaction. A reporting shareholder of a foreign corporation participates in a transaction described in paragraph (b)(6) of this section only if the published guidance identifying the transaction includes the reporting shareholder among the types or classes of persons identified as participants. A reporting shareholder (and any successor in interest) is considered to participate in a transaction under this paragraph (c)(3)(i)(G) only for its first taxable year with or within which ends the first taxable year of the foreign corporation in which the foreign corporation participates in the transaction, and for the reporting shareholder's five succeeding taxable years.

(2) Reporting shareholder. --The term reporting shareholder means a United States shareholder (as defined in section 951(b)) in a controlled foreign corporation (as defined in section 957) or a 10 percent shareholder (by vote or value) of a qualified electing fund (as defined in section 1295).

(ii) Examples. --The following examples illustrate the provisions of paragraph (c)(3)(i) of this section:

Example 1. Notice 2003-55 (2003-2 CB 395), which modified and superseded Notice 95-53 (1995-2 CB 334) (see §601.601(d)(2) of this chapter), describes a lease stripping transaction in which one party (the transferor) assigns the right to receive future payments under a lease of tangible property and treats the amount realized from the assignment as its current income. The transferor later transfers the property subject to the lease in a transaction intended to qualify as a transferred basis transaction, for example, a transaction described in section 351. The transferee corporation claims the deductions associated with the high basis property subject to the lease. The transferor's and transferee corporation's tax returns reflect tax positions described in Notice 2003-55. Therefore, the transferor and transferee corporation have participated in the listed transaction. In the section 351 transaction, the transferor will have received stock with low value and high basis from the transferee corporation. If the transferor subsequently transfers the high basis/low value stock to a taxpayer in another transaction intended to qualify as a transferred basis transaction and the taxpayer uses the stock to generate a loss, and if the taxpayer knows or has reason to know that the tax loss claimed was derived indirectly from the lease stripping transaction, then the taxpayer has participated in the listed transaction. Accordingly, the taxpayer must disclose the transaction and the manner of the taxpayer's participation in the transaction under the rules of this section. For purposes of this example, if a bank lends money to the transferor, transferee corporation, or taxpayer for use in their transactions, the bank has not participated in the listed transaction because the bank's tax return does not reflect tax consequences or a tax strategy described in the listing notice (nor does the bank's tax return reflect a tax benefit derived from tax consequences or a tax strategy described in the listing notice) nor is the bank described as a participant in the listing notice.

Example 2. XYZ is a limited liability company treated as a partnership for tax purposes. X, Y, and Z are members of XYZ. X is an individual, Y is an S corporation, and Z is a partnership. XYZ enters into a confidential transaction under paragraph (b)(3) of this section. XYZ and X are bound by the confidentiality agreement, but Y and Z are not bound by the agreement. As a result of the transaction, XYZ, X, Y, and Z all reflect a tax benefit on their tax returns. Because XYZ's and X's disclosure of the tax treatment and tax structure are limited in the manner described in paragraph (b)(3) of this section and their tax returns reflect a tax benefit from the transaction, both XYZ and X have participated in the confidential transaction. Neither Y nor Z has participated in the confidential transaction because they are not subject to the confidentiality agreement.

Example 3. P, a corporation, has an 80% partnership interest in PS, and S, an individual, has a 20% partnership interest in PS. P, S, and PS are calendar year taxpayers. In 2006, PS enters into a transaction and incurs a section 165 loss (that does not meet any of the exceptions to a section 165 loss identified in published guidance) of $12 million and offsetting gain of $3 million. On PS' 2006 tax return, PS includes the section 165 loss and the corresponding gain. PS must disclose the transaction under this section because PS' section 165 loss of $12 million is equal to or greater than $2 million. P is allocated $9.6 million of the section 165 loss and $2.4 million of the offsetting gain. P does not have to disclose the transaction under this section because P's section 165 loss of $9.6 million is not equal to or greater than $10 million. S is allocated $2.4 million of the section 165 loss and $600,000 of the offsetting gain. S must disclose the transaction under this section because S's section 165 loss of $2.
(4) Substantially similar. --The term substantially similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially similar must be broadly construed in favor of disclosure. For example, a transaction may be substantially similar to a listed transaction even though it involves different entities or uses different Internal Revenue Code provisions. (See for example, Notice 2003-54 (2003-2 CB 363), describing a transaction substantially similar to the transactions in Notice 2002-50 (2002-2 CB 98), and Notice 2002-65 (2002-2 CB 690).) The following examples illustrate situations where a transaction is the same as or substantially similar to a listed transaction under paragraph (b)(2) of this section. (Such transactions may also be reportable transactions under paragraphs (b)(3) through (7) of this section.) See §601.601(d)(2)(ii)(b) of this chapter. The following examples illustrate the provisions of this paragraph (c)(4):

Example 1. Notice 2000-44 (2000-2 CB 255) (see §601.601(d)(2)(ii)(b) of this chapter), sets forth a listed transaction involving offsetting options transferred to a partnership where the taxpayer claims basis in the partnership for the cost of the purchased options but does not adjust basis under section 752 as a result of the partnership's assumption of the taxpayer's obligation with respect to the options. Transactions using short sales, futures, derivatives or any other type of offsetting obligations to inflate basis in a partnership interest would be the same as or substantially similar to the transaction described in Notice 2000-44. Moreover, use of the inflated basis in the partnership interest to diminish gain that would otherwise be recognized on the transfer of a partnership asset would also be the same as or substantially similar to the transaction described in Notice 2000-44. See §601.601(d)(2)(ii)(b).

Example 2. Notice 2001-16 (2001-1 CB 730) (see §601.601(d)(2)(ii)(b) of this chapter), sets forth a listed transaction involving a seller (X) who desires to sell stock of a corporation (T), an intermediary corporation (M), and a buyer (Y) who desires to purchase the assets (and not the stock) of T. M agrees to facilitate the sale to prevent the recognition of the gain that T would otherwise report. Notice 2001-16 describes M as a member of a consolidated group that has a loss within the group or as a party not subject to tax. Transactions utilizing different intermediaries to prevent the recognition of gain would be the same as or substantially similar to the transaction described in Notice 2001-16. An example is a transaction in which M is a corporation that does not file a consolidated return but which buys T stock, liquidates T, sells assets of T to Y, and offsets the gain on the sale of those assets with currently generated losses. See §601.601(d)(2)(ii)(b).

(5) Tax. --The term tax means Federal income tax.

(6) Tax benefit. --A tax benefit includes deductions, exclusions from gross income, nonrecognition of gain, tax credits, adjustments (or the absence of adjustments) to the basis of property, status as an entity exempt from Federal income taxation, and any other tax consequences that may reduce a taxpayer's Federal income tax liability by affecting the amount, timing, character, or source of any item of income, gain, expense, loss, or credit.

(7) Tax return. --The term tax return means a Federal income tax return and a Federal information return.

(8) Tax treatment. --The tax treatment of a transaction is the purported or claimed Federal income tax treatment of the transaction.

(9) Tax structure. --The tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed
(d) Form and content of disclosure statement. --A taxpayer required to file a disclosure statement under this section must file a completed Form 8886, "Reportable Transaction Disclosure Statement" (or a successor form), in accordance with this paragraph (d) and the instructions to the form. The Form 8886 (or a successor form) is the disclosure statement required under this section. The form must be attached to the appropriate tax return(s) as provided in paragraph (e) of this section. If a copy of a disclosure statement is required to be sent to the Office of Tax Shelter Analysis (OTSA) under paragraph (e) of this section, it must be sent in accordance with the instructions to the form. To be considered complete, the information provided on the form must describe the expected tax treatment and all potential tax benefits expected to result from the transaction, describe any tax result protection (as defined in §301.6111-3(c)(12) of this chapter) with respect to the transaction, and identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and the identity of all parties involved in the transaction. An incomplete Form 8886 (or a successor form) containing a statement that information will be provided upon request is not considered a complete disclosure statement. If the form is not completed in accordance with the provisions in this paragraph (d) and the instructions to the form, the taxpayer will not be considered to have complied with the disclosure requirements of this section. If a taxpayer receives one or more reportable transaction numbers for a reportable transaction, the taxpayer must include the reportable transaction number(s) on the Form 8886 (or a successor form). See §301.6111-3(d)(2) of this chapter.

(e) Time of providing disclosure
(1) In general. --The disclosure statement for a reportable transaction must be attached to the taxpayer's tax return for each taxable year for which a taxpayer participates in a reportable transaction. In addition, a disclosure statement for a reportable transaction must be attached to each amended return that reflects a taxpayer's participation in a reportable transaction. A copy of the disclosure statement must be sent to OTSA at the same time that any disclosure statement is first filed by the taxpayer pertaining to a particular reportable transaction. If a reportable transaction results in a loss which is carried back to a prior year, the disclosure statement for the reportable transaction must be attached to the taxpayer's application for tentative refund or amended tax return for that prior year. In the case of a taxpayer that is a partner in a partnership, a shareholder in an S corporation, or a beneficiary of a trust, the disclosure statement for a reportable transaction must be attached to the partnership, S corporation, or trust's tax return for each taxable year in which the partnership, S corporation, or trust participates in the transaction under the rules of paragraph (c)(3)(i) of this section. If a taxpayer who is a partner in a partnership, a shareholder in an S corporation, or a beneficiary of a trust receives a timely Schedule K-1 less than 10 calendar days before the due date of the taxpayer's return (including extensions) and, based on receipt of the timely Schedule K-1, the taxpayer determines that the taxpayer participated in a reportable transaction within the meaning of paragraph (c)(3) of this section, the disclosure statement will not be considered late if the taxpayer discloses the reportable transaction by filing a disclosure statement with OTSA within 60 calendar days after the due date of the taxpayer's return (including extensions). The Commissioner in his discretion may issue in published guidance other provisions for disclosure under §1.6011-4. (2) Special rules
(i) Listed transactions and transactions of interest. --In general, if a transaction becomes a listed transaction or a transaction of interest after the filing of a taxpayer's tax return (including an amended return) reflecting the taxpayer's participation in the listed transaction or transaction of interest and before the end of the period of limitations for assessment of tax for any taxable year in which the taxpayer participated in the listed transaction or transaction of interest, then a disclosure statement must be filed, regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or a transaction of interest, with OTSA within 90 calendar days after the date on which the transaction became a listed transaction or a transaction of interest. The Commissioner also may determine the time for disclosure of listed transactions and transactions of interest in the published guidance identifying the transaction.

(ii) Loss transactions. --If a transaction becomes a loss transaction because the losses equal or exceed the threshold amounts as described in paragraph (b)(5)(i) of this section, a disclosure statement must be filed as an attachment to the taxpayer=s tax return for the first taxable year in which the threshold amount is reached and to any subsequent tax return that reflects any amount of section 165 loss from the transaction.

(3) Multiple disclosures. --The taxpayer must disclose the transaction in the time and manner provided for under the provisions of this section regardless of whether the taxpayer also plans to disclose the transaction under other published guidance, for example, §1.6662-3(c)(2).

(4) Example. --The following example illustrates the application of this paragraph (e):

Example. In January of 2008, F, a calendar year taxpayer, enters into a transaction that at the time is not a listed transaction and is not a transaction described in any of the paragraphs (b)(3) through (7) of this section. All the tax benefits from the transaction are reported on F's 2008 tax return filed timely in April 2009. On May 2, 2011, the IRS publishes a notice identifying the transaction as a listed transaction described in paragraph (b)(2) of this section. Upon issuance of the May 2, 2011 notice, the transaction becomes a reportable transaction described in paragraph (b) of this section. The period of limitations on assessment for F's 2008 taxable year is still open. F is required to file Form 8886 for the transaction with OTSA within 90 calendar days after May 2, 2011.

(f) Rulings and protective disclosures

(1) Rulings. --If a taxpayer requests a ruling on the merits of a specific transaction on or before the date that disclosure would otherwise be required under this section, and receives a favorable ruling as to the transaction, the disclosure rules under this section will be deemed to have been satisfied by that taxpayer with regard to that transaction, so long as the request fully discloses all relevant facts relating to the transaction which would otherwise be required to be disclosed under this section. If a taxpayer requests a ruling as to whether a specific transaction is a reportable transaction on or before the date that disclosure would otherwise be required under this section, the Commissioner in his discretion may determine that the submission satisfies the disclosure rules under this section for the taxpayer requesting the ruling for that transaction if the request fully discloses all relevant facts relating to the transaction which would otherwise be required to be disclosed under this section. The potential obligation of the taxpayer to disclose the transaction under this section will not be suspended during the period that the ruling request is pending.

(2) Protective disclosures. --If a taxpayer is uncertain whether a transaction must be disclosed under this section, the taxpayer may disclose the transaction in accordance with the requirements of this section and comply with all the provisions of this section, and indicate on the disclosure statement that the disclosure statement is being filed on a protective basis. The IRS will not treat disclosure statements filed on a protective basis any differently than other disclosure statements filed under this section. For a protective disclosure to be effective, the taxpayer must comply with these disclosure regulations by providing to the IRS all information requested by the IRS under this section.

(g) Retention of documents

(1) In accordance with the instructions to Form 8886 (or a successor form), the taxpayer must retain a copy of all documents and other records related to a transaction subject to disclosure under this section that are material to an understanding of the tax treatment or tax structure of the transaction. The documents must be retained until the expiration of the statute of limitations applicable to the final taxable year for which disclosure of the transaction was required under this section. (This document retention requirement is in addition to any document retention requirements that section 6001 generally imposes on the taxpayer.) The documents may include the following:

(i) Marketing materials related to the transaction;

(ii) Written analyses used in decision-making related to the transaction;

(iii) Correspondence and agreements between the taxpayer and any advisor, lender, or other party to the reportable transaction that relate to the transaction;

(iv) Documents discussing, referring to, or demonstrating the purported or claimed tax benefits arising from the reportable transaction; and documents, if any, referring to the business purposes for the reportable transaction.

(2) A taxpayer is not required to retain earlier drafts of a document if the taxpayer retains a copy of the final document (or, if there is no final document, the most recent draft of the document) and the final document (or most recent draft) contains all the information in the earlier drafts of the document that is material to an understanding of the purported tax treatment or tax structure of the transaction.
(h) Effective/applicability date

(1) In general. --This section applies to transactions entered into on or after August 3, 2007. However, this section applies to transactions of interest entered into on or after November 2, 2006. Paragraph (f)(1) of this section applies to ruling requests received on or after November 1, 2006. Otherwise, the rules that apply with respect to transactions entered into before August 3, 2007, are contained in §1.6011-4 in effect prior to August 3, 2007. (See 26 CFR part 1 revised as of April 1, 2007).

(2) [Reserved]. [Reg. §1.6011-4.]

.01 Historical Comment: Proposed 2/28/2000. Adopted 2/28/2003 by T.D. 9046. Amended 12/29/2003 by T.D. 9108, 11/1/2006 by T.D. 9295 and 7/31/2007 by T.D. 9350.


§1.6011-4., Requirement of statement disclosing participation in certain transactions by taxpayers, REG-129916-07, 9/26/2007.

Par. 2. Section 1.6011-4 is amended by:

1. Revising paragraphs (b)(7) and (c)(3)(i)(F).

2. Adding to paragraph (c)(3)(ii) Examples 4, 5, 6, and 7.

3. Revising paragraph (h)(2).

The revisions and additions read as follows:
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(b) * * *
(7) Patented transactions

(i) In general. --A patented transaction is a transaction for which a taxpayer pays (directly or indirectly) a fee in any amount to a patent holder or the patent holder's agent for the legal right to use a tax planning method that the taxpayer knows or has reason to know is the subject of the patent. A patented transaction also is a transaction for which a taxpayer (the patent holder or the patent holder's agent) has the right to payment for another person's use of a tax planning method that is the subject of the patent.

(ii) Definitions. --For purposes of this paragraph (b)(7), the following definitions apply:

(A) Fee. --The term fee means consideration in whatever form paid, whether in cash or in kind, for the right to use a tax planning method that is the subject of a patent. The term fee includes any consideration the taxpayer knows or has reason to know will be paid indirectly to the patent holder or patent holder's agent, such as through a referral fee, fee-sharing arrangement, or license. The term fee does not include amounts paid in settlement of, or as the award of damages in, a suit for damages for infringement of the patent.

(B) Patent. --The term patent means a patent granted under the provisions of title 35 of the United States Code, or any foreign patent granting rights generally similar to those under a United States patent. See §1.1235-2(a). The term patent includes patents that have been applied for but not yet granted.

(C) Patent holder. --A person is a patent holder if --

(1) The person is a holder as defined in §1.1235-2(d) and (e);

(2) The person would be a holder as defined in §1.1235-2(d)(2) if the phrase S corporation or trust was substituted for the word partnership and the phrase shareholder or beneficiary was substituted for the words member and partner;

(3) The person is an employer of a holder as defined in §1.1235-2(d) and the holder transferred to the employer all substantial rights to the patent as defined in §1.1235-2(b); or

(4) The person receives all substantial rights to the patent as defined in §1.1235-2(b) in exchange (directly or indirectly) for consideration in any form.

(D) Patent holder's agent. --The term patent holder's agent means any person who has the permission of the patent holder to offer for sale or exchange, to sell or exchange, or to market a tax planning method that is the subject of a patent. The term patent holder's agent also means any person who receives (directly or indirectly) for or on behalf of a patent holder a fee in any amount for a tax planning method that is the subject of a patent.

(E) Payment. --The term payment includes consideration in whatever form paid, whether in cash or in kind, for the right to use a tax planning method that is the subject of a patent. For example, if a patent holder or patent holder's agent receives payment for a patented transaction and a separate payment for another transaction, part or all of the payment for the other transaction may be treated as payment for the patented transaction if the facts and circumstances indicate that the payment for the other transaction is in consideration for the patented transaction. The term payment also includes amounts paid in settlement of, or as the award of damages in, a suit for damages for infringement of the patent.

(F) Tax planning method. --The term tax planning method means any plan, strategy, technique, or structure designed to affect Federal income, estate, gift, generation skipping transfer, employment, or excise taxes. A patent issued solely for tax preparation software or other tools used to perform or model mathematical calculations or to provide mechanical assistance in the preparation of tax or information returns is not a tax planning method.

(iii) Related parties. --For purposes of this paragraph (b)(7), persons who bear a relationship to each other as described in section 267(b) or 707(b) will be treated as the same person.

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(c) * * *
(3) * * *

(i) * * *

(F) Patented transactions. --A taxpayer has participated in a patented transaction, as defined in paragraph (b)(7) of this section, if the taxpayer's tax return reflects a tax benefit from the transaction (including a deduction for fees paid in any amount to the patent holder or patent holder's agent). A taxpayer also has participated in a patented transaction, as defined in paragraph (b)(7) of this section, if the taxpayer is the patent holder or patent holder's agent and the taxpayer's tax return reflects a tax benefit in relation to obtaining a patent for a tax planning method (including any deduction for amounts paid to the United States Patent and Trademark Office as required by title 35 of the United States Code and attorney's fees) or reflects income from a payment received from another person for the use of the tax planning method that is the subject of the patent.

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(ii) * * *

Example 4. (i) A, an individual, creates a tax planning method and applies for a U.S. patent. A pays attorney fees in relation to obtaining the patent and A pays the fee required under title 35 of the United States Code for the patent application. Subsequently, C pays a fee to A for the legal right to use the tax planning method that C knows or has reason to know is the subject of A's patent. A's tax return reflects both a deduction for an amount paid in relation to obtaining a patent and income from C's payment to A for the legal right to use the tax planning method that is the subject of the patent. C's tax return reflects a deduction for an amount paid to A for the right to use the tax planning method that is the subject of the patent.

(ii) A is a patent holder under paragraph (b)(7)(ii)(C)(1) of this section. The transaction is a reportable transaction for A under paragraph (b)(7) of this section because A has the right to payment for another person's use of the tax planning method that is the subject of the patent. The transaction is a reportable transaction for C under paragraph (b)(7) of this section, because C paid a fee to A for the legal right to use a tax planning method that C knew or had reason to know was the subject of a patent. A has participated in the transaction in the year in which A's tax return reflects a tax benefit in relation to obtaining the patent or reflects income from C's payment to A for the legal right to use the tax planning method that is the subject of the patent. C has participated in the transaction in the year in which C's tax return reflects the deduction for any amount paid to A for the legal right to use the tax planning method that is the subject of the patent. C also participates in the transaction for any years for which any other tax benefit from the transaction is reflected on C's tax return.

Example 5. (i) A, an individual, is the employee of B, a corporation. A creates a tax planning method and applies for a U.S. patent but B pays the fee required under title 35 of the United States Code for A's patent application. Pursuant to A's employment contract with B, B holds all substantial rights to the patent. B's tax return reflects a deduction for the amount paid in relation to obtaining the patent.

(ii) A and B are patent holders under paragraph (b)(7)(ii)(C)(1) and (3) of this section, respectively. The transaction is not a reportable transaction for A under paragraph (b)(7) of this section because A does not have the right to payment for another person's use of the tax planning method that is the subject of the patent. The transaction is a reportable transaction for B under paragraph (b)(7) of this section because B holds all substantial rights to the patent and has the right to payment for another person's use of the tax planning method that is the subject of the patent. B has participated in the transaction in the year in which B's tax return reflects a tax benefit in relation to obtaining the patent. B also participates in the transaction for any years for which B's tax return reflects income from a payment received from another person for the use of the tax planning method that is the subject of the patent.

Example 6. (i) Assume the facts as in Example 4, except that A agrees to license the patent to F, a financial institution. The license agreement between A and F provides that F may offer the tax planning method to its clients and if a client decides to use the tax planning method, F must pay A for each client's use of the tax planning method. F offers the tax planning method to G who uses the tax planning method and knows or has reason to know it is the subject of a patent. F charges G for financial planning services and pays A for G's use of the tax planning method. A's tax return reflects income from the payment received from F. F's tax return reflects income from the payment received from G, and G's tax return reflects a deduction for the fees paid to F.

(ii) F is a patent holder's agent under paragraph (b)(7)(ii)(D) of this section because F has the permission of the patent holder to offer for sale or exchange, to sell or exchange, or to market a tax planning method that is the subject of a patent. F also is a patent holder's agent under paragraph (b)(7)(ii)(D) of this section because F receives (directly or indirectly) a fee in any amount for a tax planning method that is the subject of a patent for or on behalf of a patent holder. The transaction is a reportable transaction for both A and F under paragraph (b)(7) of this section because A and F each have the right to payment for another person's use of the tax planning method that is the subject of the patent. The transaction is a reportable transaction for G under paragraph (b)(7) of this section because G paid a fee (directly or indirectly) to a patent holder or a patent holder's agent for the legal right to use a tax planning method that G knew or had reason to know was the subject of the patent. A has participated in the transaction in the years in which A's tax return reflects income from the payment received from F for G's use of the tax planning method that is the subject of the patent. F has participated in the transaction in the years in which F's tax return reflects income from the payment received from G for use of the tax planning method that is the subject of the patent. G has participated in the transaction in the years in which G's tax return reflects a deduction for the fees paid to F. G also participates in the transaction for any years for which any other tax benefit from the transaction is reflected on G's tax return.

Example 7. Assume the same facts as in Example 4. J uses a tax planning method that is the same as the tax planning method that is the subject of A's patent. J does not pay any fees to any patent holder or patent holder's agent with respect to the tax planning method that is the subject of the patent. A sues J for infringement of the patent and J pays A an amount for damages. A's tax return reflects as income the amounts for damages received from J. The transaction is not a reportable transaction for J under paragraph (b)(7) of this section because J did not pay any fees (as defined in paragraph (b)(7)(ii)(A) of this section) (directly or indirectly) to a patent holder or patent holder's agent for the legal right to use a tax planning method that J knew or had reason to know was the subject of the patent. A has participated in a reportable transaction under paragraph (b)(7) of this section in the year in which A's tax return reflects income from a payment (the amount received as an award for damages in a suit for damages for infringement of the patent) received from another person for the use of the tax planning method that is the subject of a patent.

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(h) * * *

(2) Patented transactions. --Upon the publication of the Treasury decision adopting these rules as final regulations in the Federal Register, paragraphs (b)(7), (c)(3)(i)(F), and (c)(3)(ii) Examples 4 through 7 of this section will apply to transactions entered into on or after September 26, 2007.

return preparers and 6707A liability

Return preparers are "persons" within the meaning of section 6707A. Therefore, if a return preparer is involved with a tax return that supports a "reportable transaction" or a "listed transaction" then the $10,000 and $100,000 penalties will apply.

Obviously, return preparers need to be aware of all of the IRS "listed transactions" and "reportable transactions." New positions are published by the IRS at a regular rate. If you do not keep up with those IRS notices, then at least be aware of any transaction that has the potential for tax avoidance or tax evasion.



PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION INFORMATION WITH RETURN



6707A(a) IMPOSITION OF PENALTY. --Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).



6707A(b) AMOUNT OF PENALTY. --



6707A(b)(1) IN GENERAL. --Except as provided in paragraph (2), the amount of the penalty under subsection (a) shall be --



6707A(b)(1)(A) $10,000 in the case of a natural person, and



6707A(b)(1)(B) $50,000 in any other case.



6707A(b)(2) LISTED TRANSACTION. --The amount of the penalty under subsection (a) with respect to a listed transaction shall be --



6707A(b)(2)(A) $100,000 in the case of a natural person, and



6707A(b)(2)(B) $200,000 in any other case.



6707A(c) DEFINITIONS. --For purposes of this section:



6707A(c)(1) REPORTABLE TRANSACTION. --The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.



6707A(c)(2) LISTED TRANSACTION. --The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.



6707A(d) AUTHORITY TO RESCIND PENALTY. --



6707A(d)(1) IN GENERAL. --The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if --



6707A(d)(1)(A) the violation is with respect to a reportable transaction other than a listed transaction, and



6707A(d)(1)(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.



6707A(d)(2) NO JUDICIAL APPEAL. --Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.



6707A(d)(3) RECORDS. --If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including --



6707A(d)(3)(A) a statement of the facts and circumstances relating to the violation,



6707A(d)(3)(B) the reasons for the rescission, and



6707A(d)(3)(C) the amount of the penalty rescinded.



6707A(e) PENALTY REPORTED TO SEC. --In the case of a person --



6707A(e)(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and



6707A(e)(2) which --



6707A(e)(2)(A) is required to pay a penalty under this section with respect to a listed transaction,



6707A(e)(2)(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or



6707A(e)(2)(C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c),



the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.



6707A(f) COORDINATION WITH OTHER PENALTIES. --The penalty imposed by this section shall be in addition to any other penalty imposed by this title.


.01 Added by P.L. 108-357. Amended by P.L. 110-172 (clerical amendment). For details, see the Code Volumes.



If you need guidance on problematical positions, contact us at ab@irstaxattorney.com This statute is a trap for the unwary tax return preparer. Let us know if you want us to upload some "reportable" and "listed" transactions that have been published by the IRS