The IRS takes tax collection seriously; it’s best to avoid being on the receiving end of its wrath at all costs! At Gartzman Law Firm, we are amazed to watch the reporting surrounding increased global IRS collection efforts. Watching Switzerland, one of the most secretive tax havens buckle under IRS pressure, would have been nearly impossible to imagine only five years ago. Clearly, times have changed. An article in Forbes: Reporting Yourself to the IRS caused me to consider the benefits of IRS disclosure, particular the subject of reportable transactions where the IRS uncovers many abusive tax shelters.  In my nearly thirty years providing tax help in Atlanta, Georgia, I have found that disclosing information to the IRS when requested is a safer way to stay compliant and proactive, something the IRS may ultimately treat favorably should you ever be asked to explain your records.

Defining reportable transactions is difficult because of its broad and complex subject matter. But simply stated, if you entered into a transaction for the purpose of tax reduction or avoidance, then you need to disclose that information to the IRS. As a Georgia Tax attorney and CPA, we recommend to clients with possible reportable transactions that we do the due diligence necessary to make sure all transactions are correctly disclosed because often some are related to legitimate business transactions with no basis in tax evasion. We at Gartzman Law Firm take the time to be sure.

In 2004, the American Job Creation Act of 2004 raised all penalties associated with reportable transactions for good. Prior to 2004, taxpayers could get penalized for not disclosing reportable transactions only if the IRS could successfully prove it, so many taxpayers were not as concerned. Designed to benefit American businesses by giving them tax breaks, the American Job Creation Act needed to offset these breaks with tax increases. So the IRS sought to do so by significantly increasing the penalties associated with exposing abusive tax shelters and to crack down hard on tax cheats. To keep track, the IRS requires taxpayers to disclose such transactions by submitting a Reportable Transaction Disclosure Statement Form 8886 with their tax return.

IRS regulations state a failure to disclose a non-listed reportable transaction, the §6707A penalty is $10,000 if the taxpayer is an individual, and $50,000 for all other taxpayers.  If the violation involves a listed transaction, the penalty is $100,000 for individuals and $200,000 for all other taxpayers.

The argument for disclosure-vs.-non-disclosure looks something like this:

• Not disclosing a reportable transaction that results in a tax understatement (meaning the actual amount owed is higher than the amount paid) could tack on additional penalty of 30% of the understatement. A statute of limitations could be ignored for other transactions that are not disclosed in addition to the penalties assessed.
• Disclosing the reportable transaction, subjects a taxpayer to a 20% penalty on the understatement.

This Atlanta tax attorney and CPA work tirelessly to keep clients IRS compliant including providing voluntary disclosure information when prompted. With huge penalties involved, if you are someone who may be considering sheltering their money, you are advised to contact a tax attorney or CPA who can help you make an informed decision. What you think you may gain in tax savings for shelter, may be dwarfed by huge fines and penalties levied against you. It’s best not to gamble with the IRS without proper education and research, as the odds are not in your favor.