The IRS is nosy. They want you to report everything! They want to know how much you make, how much you spend, how you calculate it, and so on. While simply including the amount and the method of valuation will suffice for most numbers on your tax return, there’s this subset of transactions that IRS wants a little more information on. These transactions are called reportable transactions. While reportable transactions are most likely not occurring on the average person’s tax return, these are the types of tax rules that can slowly creep up on you as you increase your income, whether that be through a new business venture, increased income, or an inheritance. So, what exactly are reportable transactions? According to Treasury Regulation Section 1.6011-4, treportable transactions fall into five categories.
- Listed transactions – a transaction that is the same or similar to a tax avoidance transaction as determined by IRS notice, regulation, or other published guidance. The IRS maintains a list of recognized and abusive transactions at https://www.irs.gov/businesses/corporations/ listed-transactions.
- Confidential transactions – a transaction between a taxpayer and advisor where a minimum fee is paid to limit disclosure of the tax treatment or tax strategies to protect the advisor’s tax guidance.
- Transactions with contractual protection – a transaction providing the taxpayer with a refund (full or partial) if the intended outcome or benefits of the transactions are not received.
- Loss transactions – a section 165 loss—a loss due to wagering, theft, capital, worthless securities, disaster, insolvent financial institutions—meeting a minimum loss amount based on the taxpayer legal formation status as either an individual, a trust, a partnership, an S corporation, and corporations
- Transactions of interest – a transactions that the IRS has determined as a transaction of interest by notice, regulation, or other published guidance. The IRS maintains a list of transactions of interest at https://www.irs.gov/businesses/corporations/transactions-of-interest.
Here’s some free advice: report these transactions. Use IRS Form 8886, which is basically two pages of the IRS inquiring about the how and who of the associated tax benefit. But, if you feel so inclined not to report these transactions, the IRS has a penalty for failure to disclose reportable transactions information. The penalty is 75% of the reduction in the tax reported due to the transaction or the tax that would have resulted if the transaction were respected for federal tax purposes. The maximum penalty varies based on the type of reportable transactions, with the largest penalties being $100,000 for individual/$200,000 for all other entities for listed transactions.