20.1.13. Material Advisor and Reportable Transactions Penalties

(1) Material advisor and reportable transaction penalties provide the IRS with important tools to enhance voluntary compliance by taxpayers. See IRM 1.2.1.12.1, Policy Statement 20–1 (Formerly P-1-18), Penalties are used to enhance voluntary compliance.

(1) Pertinent IRC sections related to material advisor and reportable transaction penalties include:

• IRC 6011, General requirement of return, statement, or list

• IRC 6111, Disclosure of reportable transactions

• IRC 6112, Material advisors of reportable transactions must keep lists of advisees, etc

• IRC 6662A, Imposition of accuracy-related penalty on understatement with respect to reportable transactions

• IRC 6707, Failure to furnish information regarding reportable transactions

• IRC 6707A, Penalty for failure to include reportable transaction information with return

• IRC 6708, Failure To maintain lists of advisees with respect to reportable transactions

• IRC 7408, Actions To enjoin specified conduct related to tax shelters and reportable transactions

(1) The Director, Business Support, is the director responsible for the servicewide civil penalty program.

(2) IRM 20.1.13 provides servicewide policy for the administration of material advisor penalties and reportable transaction penalties on participants.

(3) IRS operating divisions/business unit (OD/BU) functions may develop additional guidance or reference materials for their specific OD/BU functional administrative needs. These reference materials should receive approval from OSP prior to distribution and are to remain consistent with the following:

1. Procedures set forth in this IRM,

2. Policy Statement 20-1 in IRM 1.2.1.12.1, and

3. Any other guidance relating to civil penalties.

(4) Overall responsibility for the penalty programs is assigned to OSP. The OSP is charged with coordinating policy and procedures concerning the administration of penalty programs and ensuring consistency with the penalty policy statement.

(5) Every function in the IRS has a role in proper material advisor and reportable transaction penalty administration. It is essential each function conduct its operations with an emphasis on promoting voluntary compliance.

(6) Examiners should keep in mind the following objectives when handling each material advisor and reportable transaction penalty case:

1. Make the right decision from the beginning. A wrong decision, even though eventually corrected, may have a negative impact on voluntary compliance.

2. Give each taxpayer the opportunity to have their interests heard and considered.

3. Provide opportunity for incorrect decisions to be corrected.

4. Treat each case in an impartial and honest way.

5. Use each material advisor and reportable transaction penalty case as an opportunity to educate the taxpayer, help the taxpayer understand legal obligations and rights, assist the taxpayer in understanding procedural rights, and observe the taxpayer’s procedural rights.

6. Process and resolve each taxpayer’s case promptly.

(7) All actions will be done in accordance with the Taxpayer Bill of Rights as listed in IRC 7803(a)(3).

(8) Taxpayers may express concern about difficulty obtaining a solution to a problem or timely and appropriate response to an inquiry. In these instances, see IRM 20.1.1.1.6.2, Taxpayer Advocate Service (TAS) Guidelines, for more information.

(1) Every function in the IRS has a role in proper penalty administration. It is essential each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate business reviews should be conducted to ensure consistency with the Policy Statement 20-1 and its philosophy. Attention should be directed to the coordination of penalty programs between offices and functions to ensure approaches are consistent and penalty information is used for identifying and responding to compliance problems.

(2) Supervisors should continuously review information for trends which may suggest changes in compliance programs, training courses, educational programs, penalty design, and penalty administration. Supervisors should institute, on an ongoing basis, a quality review system to evaluate the timely and correct disposition of penalty cases and encourages consistent administration of penalties.

(1) Refer to Exhibit 20.1.13-1, for a list of acronyms used within this IRM section.

(2) Reportable transaction: IRC 6707A(c)(1) states 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 IRC 6011, IRC 6111, and IRC 6112, such transaction is of a type the Secretary determines as having a potential for tax avoidance or evasion.

(3) Listed transaction: IRC 6707A(c)(2) states the "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 IRC 6011, IRC 6111, and IRC 6112.

(1) Additional resources include:

• Office of Tax Shelter Analysis (OTSA) https://irssource.web.irs.gov/LBI/Lists/CP_A/DispItemForm.aspx?ID=55

• Promoter Investigations Guidelines https://irssource.web.irs.gov/LBI/Lists/CP_A/DispItemForm.aspx?ID=17&ContentTypeId=0x01002A4227255A92BA49B566D49AE5D487A5

• Abusive Transactions Investigations Knowledge Management https://portal.ds.irsnet.gov/sites/vl011/lists/abusivetransactioninvestigations/landingview.aspx

• List of “listed transactions” https://irssource.web.irs.gov/LBI/003/Forms/AllItems.aspx?RootFolder=%2fLBI%2f003%2fListed%20Transactions

• IRM 25.6.1, Statute of Limitations Processes and Procedures

• IRM 4.7.5, Examination Returns Control System (ERCS)

(1) IRC 6751(b), Approval of Assessment, provides, in general, no penalty under the Code shall be assessed unless the initial determination of such assessment is personally approved, in writing, by the immediate supervisor of the individual making such determination or such higher-level official as the Secretary may designate. This provision is effective for notices issued and penalties assessed after December 31, 2000. The procedural requirements provided in IRC 6751(b) do not apply to any addition to tax under IRC 6651, IRC 6654, IRC 6655; IRC 6662(b)(9), or any other penalty automatically calculated through electronic means.

(1) Persons acting as material advisors are required to file a form disclosing they acted as a material advisor with respect to a reportable transaction.

(2) IRC 6707, as amended by the AJCA, imposes a penalty for a material advisor who:

1. Fails to file the required return on or before the date prescribed, or

2. Files false or incomplete information with the Secretary with respect to such transaction.

(3) The penalty under IRC 6707 applies to returns due after October 23, 2004, the date of enactment.

(1) An examiner should not start a material advisor examination without documented approval from the Lead Development Center (LDC) for SB/SE and TE/GE. For LB&I, the examiner will refer information gathered to the Office of Tax Shelter Analysis (OTSA) and the Technical Tax Shelter Promoter Committee (TTSPC) will authorize examination.

(2) The LDC:

• Processes material advisor referrals.

• Evaluates the referral based on established criteria.

• Authorizes IRC 6707 investigations.

• Forwards approved investigation case files to Area Planning & Special Programs (PSP) units for assignment.

(3) With respect to LB&I material advisor investigations:

• Examiners report suspected cases of material advisor activity to OTSA.

• Examiners forward their findings and supporting documentation to OTSA.

• OTSA reviews and develops the referrals.

• OTSA sends the referrals to the TTSPC that meet established TTSPC criteria.

• TTSPC reviews the referrals and authorizes a material advisor investigation, as appropriate.

  Note: Only the TTSPC authorizes a material advisor investigation in LB&I.

(1) IRC 6707 penalties must be assessed within 3 years of filing Form 8918, Material Advisor Disclosure Statement.

(2) Penalties may be assessed at any time if a person required to disclose material advisor status failed to file the required forms.

(1) The amount of the penalty under IRC 6707 for failure to furnish information regarding reportable transactions, other than listed transactions, is $50,000.

(2) A separate cumulative penalty is assessed in the year the failure is discovered for each type of listed transaction from which an advisor derives income.

(3) If the penalty is with respect to a listed transaction, the amount of the penalty is the greater of the following:

1. $200,000, or

2. 50 percent of the gross income derived by the material advisor with respect to aid, assistance, or advice which is provided before the date the information return is filed under IRC 6111.

   Example: An advisor becomes a material advisor to Client X in 2018 with respect to a listed transaction. The advisor derives $400,000 in gross income from advice given to Client X in 2018 even though the advisor has not yet received the income. The advisor unintentionally does not file a Form 8918. In 2019, the advisor becomes a material advisor to Client Y with respect to the same type of listed transaction. The gross income the advisor expects to receive in 2019 from the advice given to Client Y is $100,000. The advisor does not become a material advisor with respect to any other client and unintentionally still does not file a Form 8918 with respect to the transaction. In 2020, it is determined during an examination the advisor should have filed Form 8918 for the transactions in 2018 and 2019 and failed to do so by the prescribed date. The advisor is subject to one IRC 6707 penalty in 2020 (the year the failure is discovered) of $250,000 (50 percent of the gross income [$400,000 in 2018 and $100,000 in 2019] ) as there was only one type of listed transaction involved during the two years.

(4) In the case of intentional failure to act, the penalty is 75 percent of the gross income derived by the material advisor with respect to aid, assistance, or advice provided before the date the information return is filed.

(1) IRC 6707 penalties have post assessment appeal rights.

(2) Persons may request, and may be granted, an administrative hearing with Appeals after penalty assessment if there has not been a prior administrative hearing with Appeals. See IRM 8.11.7.5.1, Promoter Rights for IRC 6707 and IRC 6708 Assessments.

(3) Penalties under IRC 6707 have been designated as appeals coordinated issues (ACI). See IRM 8.11.7, Penalties Worked in Appeals, Abusive Transaction Penalties.

(4) Taxpayers and material advisors, in general, are entitled to one administrative hearing with Appeals. See 26 CFR 601.106, Appeals functions.

(1) Penalties for reportable transactions, that are not listed transactions, can only be rescinded in exceptional circumstances where rescinding the penalty would promote compliance with the tax laws and effective tax administration.

(2) The authority to rescind the penalty can only be exercised by the Commissioner or their delegate. See IRM 1.2.2.2.20, Delegation Order 1-23 (formerly DO-193, Rev. 6), Authorization to Perform Functions of the Commissioner.

(3) There is no right to appeal a refusal to rescind a penalty.

(4) For further rescission information see IRM 20.1.13.3.6, Penalty Rescission - IRC 6707A Penalties.

(1) The penalty under IRC 6707A applies to returns due after October 22, 2004, AJCA enactment date.

(1) This section describes IRC 6707A penalty case procedures in compliance field groups.

(2) Where differences in business unit procedures exist, examiners should follow respective business unit IRMs.

(1) The general period of limitations with respect to IRC 6707A is three years from the date of the filing of the return to which the disclosure should have been attached.

• Under the IRC 6011 regulations, disclosure of a reportable transaction on Form 8886, Reportable Transaction Disclosure Statement, is not always made with the taxpayer's return.

• If a disclosure is not required with a return, then no limitations period applies to assessment of the IRC 6707A penalty. See IRM 20.1.13.3.3.1, Statute of Limitations When Disclosure Is Required With a Return and IRM 20.1.13.3.3.2, Statute of Limitations When Disclosure Is Required Without a Return, for further information.

(2) Form 872, Consent to Extend the Time to Assess Tax secured for the underlying tax does not extend the period of limitations for assessment of the IRC 6707A penalty unless the form includes specific language addressing the penalty. IRM 25.6.22.6.17.10, Assessable Penalties.

(3) Examiners should also consult IRM 25.6.22.2.1, Assessment Statute Extension, which requires a managerial approval for the examiner to solicit a consent and IRM 25.6.22.3, Notification of Taxpayer's Rights, requiring the examiner to advise the taxpayer of their right not to extend the statute.

(4) Proceed to assessment as described in IRM 20.1.13.3.2.3.4.1 and offer the taxpayer a post-assessment appeal consideration if the taxpayer refuses to extend the statute. See IRM 20.1.13.3.5.2, Sending the Case to Appeals-Post Assessment Consideration, for additional information.

(5) The limitation period for assessing the penalty against an S corporation or partnership depends on when the entity was required to disclose its participation and is not controlled by the associated shareholders’ or partners’ statute.

(6) The statutory notice of deficiency suspends the time to assess a deficiency (during the 90-day period to file a petition with the Tax Court, while the case is before the Tax Court, and an additional 60 days after the Court's decision is final) but does not suspend the time to assess the IRC 6707A penalty, so the examiner needs to ensure the penalty is assessed timely.

(1) The amount of the penalty is "75 percent of the decrease in tax shown on the return" as a result of the reportable transaction (or which would have resulted from such transaction if such transaction were respected for federal tax purposes), subject to the maximum and minimum limits.

1. The maximum penalty in the case of a listed transaction is $100,000 for a natural person and $200,000 for all other taxpayers. In the case of a non-listed reportable transaction, the maximum penalty is $10,000 for a natural person and $50,000 for all other taxpayers.

2. The minimum penalty for each reportable transaction (listed or non-listed) is $5,000 for a natural person and $10,000 for all other taxpayers.

(2) A taxpayer who fails to disclose a reportable transaction with a return (including an amended return or application for tentative refund) and who fails to provide a copy of the form as required to OTSA will only be subject to a single penalty under 6707A for failure to make those disclosures. The penalty is also applicable if the taxpayer complies with only one of these two requirements. See 26 CFR 301.6707A-1(c)(1) and IRM 20.1.13.3.4.2, IRC 6011- Overview of Disclosure Requirements, for a discussion of when the Form 8886, Reportable Transaction Disclosure Statement, is sent to OTSA.

(3) The following two examples from 26 CFR 301.6707A-1(c) illustrate the application of the IRC 6707A penalty for failure to comply with the requirement to file a reportable transaction disclosure statement:

1. Example 1—Taxpayer T is required to attach a Form 8886 to the 2008 return and send a copy of the Form 8886 to OTSA at the time the return is filed. Taxpayer T fails to attach the Form 8886 to the return and fails to send a copy of the Form 8886 to OTSA. Taxpayer T is subject to a single penalty under IRC 6707A for failure to disclose because Taxpayer T failed to comply with the disclosure requirements of IRC 6011 as described in 26 CFR 1.6011-4(d) and 26 CFR 1.6011-4(e). A penalty under IRC 6707A also would apply if Taxpayer T had failed to comply with only one of the two requirements.

2. Example 2- Same as Example 1, except Taxpayer T also subsequently files an amended return for 2008 reflecting Taxpayer T's participation in the reportable transaction described in Example 1. Taxpayer T fails to attach a Form 8886 to the amended return as required by Treas. Reg. 1.6011-4(e)(1). Taxpayer T is subject to an additional penalty under IRC 6707A for failing to disclose a reportable transaction on the amended return for 2008.

(4) Filing an amended return with a disclosure will not cure the failure to file a disclosure with the original return.

(5) IRC 6707A penalties can apply at both the entity and the individual levels. Each entity must be separately analyzed to determine if it is required to disclose participation in a reportable transaction, and file Form 8886 with its return, and if necessary, with OTSA. See IRM 20.1.13.3.4.2, IRC 6011 Overview of Disclosure Requirements, for a discussion of when the Form 8886 is sent to OTSA.

(6) The IRC 6707A penalty will not be imposed in instances when the disclosure statement is due with a return, until the taxpayer files a return. In other words, where a disclosure is due with the return, an IRC 6707A penalty will not be imposed where a taxpayer has not yet filed a return, even if the due date for the return has already passed or where the taxpayer files a late return that includes the required disclosure statement (and the required copy to OTSA, if required). In instances where the disclosure statement is not due with a return, such as when a transaction is listed after the taxpayer files a return reflecting participation and is required to provide a disclosure statement to OTSA within 90 days of publication of the listing notice, the penalty is applicable after expiration of the 90-day period.

(1) Taxpayers have pre-assessment Appeals consideration of any proposed IRC 6707A penalty. See IRM 20.1.13.3.5.1, Sending the Case to Appeals—Pre-Assessment Consideration, for more information.

(2) A taxpayer is offered post-assessment appeal consideration where the IRC 6707A penalty must be assessed before the Government can offer the taxpayer an opportunity to seek pre-assessment Appeals consideration. See IRM 20.1.13.3.5.2, Sending the Case to Appeals—Post-Assessment Consideration.

(3) The taxpayer must submit a timely written request (regardless of the total amount of the proposed assessment) in response to the 30-day letter or the post-assessment notice, and follow the standard protest procedures for Appeals consideration. See IRM 8.11.7.6, IRC 6707A Penalties Overview.

(4) See IRM 4.10.8.12.9.3, Request for Appeals Conference, for managerial and examiner actions when an Appeal request is received.

(1) Non-listed reportable transactions are eligible for total or partial penalty rescission.

(2) Listed transactions are not eligible for rescission consideration.

(3) A taxpayer must have exhausted the administrative remedies available within Appeals regarding the proposed or assessed penalty.

(4) A taxpayer does not have to pay the assessed penalties to receive rescission consideration; however, the IRS will not suspend collection efforts solely because the taxpayer has made a request for rescission.

(5) The business operating division (BOD) Commissioner over the penalty examination is delegated the authority to rescind the penalty in part or in full. See IRM 1.2.2.2.20, Delegation Order 1-23 (formerly DO-193, Rev. 6), Authorization to Perform Functions of the Commissioner.

(6) The taxpayer must:

• Request rescission within 30 days of notice and demand or full payment of the penalty, whichever is earlier.

• Send the rescission request to OTSA for review.

• Provide additional information requested within 30 days of the request date.

(7) OTSA, upon receiving a rescission request, will:

• Review the request to ensure it meets the requirements of Rev. Proc. 2007-21 and 26 CFR 301.6707A-1(d).

• Return any request not meeting the requirements with a written request to the taxpayer seeking additional information and documents relating to the transaction.

• Grant an extension of time for additional information to persons showing good cause.

• Ask the examiner, appeals officer, or other IRS employees involved with the examination to review and comment on the rescission request.

• Prepare any letters to be issued to the taxpayer for signature.

• Obtain concurrence for accepted or denied taxpayer rescission requests from the Commissioner or their delegate.

  Note: If an agreement is not obtained, the Commissioner or their delegate will resolve any issues prior to securing final penalty approval.

• Complete a short summary of the penalty amount, basis for assertion, basis for rescission, and recommendation.

• Monitor the taxpayer account to ensure abatements are posted for granted rescission requests.

• Notify the IRS BOD having the taxpayer's return under consideration (e.g., Exam, Appeals, or Counsel) of the rescission request determination.

(8) The Commissioner or their delegate, when applicable, will:

• Provide concurrence for accepted or denied rescission decisions.

• Resolve any issues on unagreed requests.

• Provide final penalty approval.

(9) The Commissioner or their delegate will:

• Sign the letter prepared by OTSA and mail to the taxpayer

• Retain a copy of the signed letter and summary sheet.

• Send the rescission request package, including the signed letter copy, to OTSA.

• Contact OTSA for additional information needed.

• Notify OTSA of disagreement with the recommendation.

• Maintain a record of the facts and circumstances relating to the violation and determination.

• Retain the amount of penalty rescinded, if any, and the reasons to or not to rescind. See IRM 1.15.2, Records and Information Management, Types of Records and Their Life Cycles.

(10) The rescission determination is not subject to review by Appeals or by any court.

(1) A penalty can only be abated, if the penalty does not legally apply and was assessed in error.

(2) If the examiner determines an assessment is to be abated in full or in part, the examiner must:

1. Obtain managerial approval and ensure the record of approval is associated with the case files. Examiners may use the standard penalty approval form available to record managerial approval of the abatement.

2. Use Form 5345-D, Examination Request—ERCS, to establish the penalty on ERCS.

3. Complete a Form 8278. In column E (amount abated), enter total dollar amount of penalties to be abated in parenthesis. Ensure the amount abated does not exceed the amount originally assessed. In column F, enter the penalty reason code. See IRM Exhibit 20.1.1-2, Penalty Reason Code Chart, for a list of appropriate penalty reason codes and explanations.

   Caution: Always use the most current version of the Form 8278.

4. Ensure all documents related to the abatement are associated with the case files.

5. Prepare and send the case for closure from the group following local procedures.

6. Check the Civil Penalties (Form 8278) box in the "Special Features" section of Form 3198.

7. Check the "No letter required to be sent by CCP" box on the second page of Form 3198, in the letter instructions for CCP area.

(1) IRC 6112, as amended by the AJCA, requires a material advisor to maintain a list identifying each person with respect to whom the advisor acted as a material advisor with respect to a transaction (and such other information as required by regulations) and applies to transactions with respect to which material aid, assistance, or advice is provided after October 23, 2004. The availability and retention of information rules of this section also apply to any person who was required to maintain a list under section 6112(a) as in effect before the enactment of the AJCA.

(2) IRC 6708, as amended by the AJCA, imposes a penalty for a material advisor's failure to maintain a list under IRC 6112 and applies to requests for such lists made after October 23, 2004. This section applies to all requests for lists required to be maintained under IRC 6112, including the lists persons were required to maintain under IRC 6112(a) as in effect before October 23, 2004.

(1) Under no circumstances should an examiner start a material advisor examination without documented approval from the LDC for SB/SE and TE/GE and TTSPC for LB&I.

(2) SB/SE functional procedures and guidance can be found at http://portal.ds.irsnet.gov/sites/vl015/lists/sbseexaminationprocedures3/landingview.aspx.

(3) SB/SE LDC:

1. Processes referrals concerning material advisors.

2. Evaluates referrals based on established criteria.

3. Authorizes IRC 6708 investigations when warranted.

4. Forwards case files to the appropriate area’s PSP for assignment to the field.

(4) LB&I functional guidance and procedures for IRC 6708, material advisor investigations include the following:

1. OTSA has responsibility for making referrals of suspected promoters of abusive tax avoidance transactions and material advisors to the LB&I TTSPC.

2. TTSPC, only, can authorize a promoter and or material advisor examination, as appropriate.

3. Examiners report suspected cases of material advisor and or promoter activity and forward their findings, along with supporting documentation, to the OTSA designated senior analyst.

4. OTSA will review and develop these referrals; and those meeting the criteria set forth by the TTSPC will be recommended for audit consideration.

(1) There is no statute of limitations on assessment. SeeIRM 4.32.2.12.8.1, Assessment Statute of Limitations.

(1) A material advisor, who fails to make the list available upon written request by the Secretary within 20 business days after the request, will be subject to a penalty of $10,000 for each day of such failure after the 20th business day.

(2) Reasonable cause is made on a case-by-case and day-by-day basis.

(1) Post-assessment appeal rights exist for IRC 6708 penalties.

(2) Requests for an administrative hearing with Appeals, after assessment, will generally be granted in cases where there has not been a prior administrative hearing with Appeals. See IRM 8.11.7.5.1, Promoter Rights for IRC 6707 and IRC 6708 Assessments and 26 CFR 601.106, Appeals functions.

(3) Material advisor penalties under IRC 6708 have been designated as ACI.

(4) Material advisor penalties may be subject to Rev. Proc. 2015-40, Procedures for Requesting Competent Authority Assistance under Tax Treaties and Rev. Proc. 2017-25, SB/SE–Appeals Fast Track Mediation Procedure. See IRC 6320, Notice and Opportunity for Hearing Upon Filing of Notice of Lien, and IRC 6330, Notice and Opportunity for Hearing Before Levy.

(5) See IRM 4.32.2.12.9.2, Appeals for IRC 6707 and IRC 6708 Assessments, for additional information on Appeal procedures.