Recognized Abusive and Listed Transactions

Businesses and individuals regularly seek to structure their transactions in the most tax-efficient matter. There are instances, however, when the expected tax results eclipse the economic substance of the transaction, and the IRS denies those benefits as a tax avoidance transaction. A listed transaction is a type of tax transaction that is the same as or substantially similar to a type determined to be a tax avoidance transaction by the IRS and identified by notice, regulation, or other form of published guidance as a listed transaction. The full list, and more detailed descriptions of each type of transaction, can be found here: Listed Transactions | Internal Revenue Service (irs.gov)

Earlier this year, the IRS included monetized installment sales as part of its Dirty Dozen list of common tax scams and schemes. The Treasury Department and Internal Revenue Service (“IRS”) have now released proposed regulations identifying monetized installment sale transactions and substantially similar transactions as additional types of “listed transactions.” See 2023-16650.pdf (federalregister.gov)

Listed transactions are reportable transactions, which means that taxpayers who have entered into a listed transaction are required to file a disclosure statement, Form 8886, Reportable Transaction Disclosure Statement, with their tax return for each taxable year for which they participate in such listed transaction. Subject to maximum and minimum limits, the penalty for failure to include information with respect to any reportable transaction is 75 percent of the decrease in tax shown on the return as a result of the transaction or the decrease that would have resulted from the transaction if it were respected for Federal tax purposes. Taxpayers should remember that when a transaction seems too good to be true, it often is.

Thank you Michelle E. Espey for this week’s Tax Tracker!