Tax Shelter Disclosure and Penalties: New Requirements, New Exposures

Posted: 8 Jul 2005

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One of the primary weapons in the battle against tax shelters has been mandatory disclosure to the IRS. The American Jobs Creation Act of 2004 built on this approach by clarifying and making consistent the various disclosure requirements and strengthening penalties for non-disclosure. To uncover abusive transactions, Congress drew the boundaries of disclosure so broadly that even legitimate tax planning transactions are covered. To understand the dangers in the new rules, one must look at the broad range of transactions covered, the participants covered, and the harsh penalties for nondisclosure.

- Transactions Covered. The disclosure requirements apply to six categories of "reportable transactions." Although the Service has established "angel lists" excluding some transactions from the broad definitions, many clearly legitimate transactions still will have to be disclosed.

- Participants Covered. The disclosure requirements apply to participants in the transaction and material advisors, which are also broadly defined terms. For example, an exempt organization that is an accommodation party in a reportable transaction is a participant, even though the exempt organization does not receive any tax benefits from the transaction.

- Penalties. The Act added a new penalty for a taxpayer's failure to disclose a reportable transaction. This penalty applies even if a court rejects the Service's view of the tax treatment of the transaction. The Act also strengthened the accuracy-related penalty for underpayments. However, this penalty is imposed only if the Service successfully challenges the tax treatment of the transaction.

The new tax shelter disclosure and list maintenance requirements are complex, with significant penalties for non-compliance. The IRS is likely to apply these penalties strictly and aggressively. Anyone involved in virtually any capacity in any substantial transaction will need to evaluate their exposure carefully.

Suggested Citation

McNulty, Mary A. and Probasco, Robert D., Tax Shelter Disclosure and Penalties: New Requirements, New Exposures. Journal of Taxation and Regulation of Financial Institutions, January/February 2005 . Available at SSRN:

Mary A. McNulty (Contact Author)

Thompson & Knight LLP ( email )

1722 Routh St.
Suite 1500
Dallas, TX 75201
United States
(214) 969-1187 (Phone)
(214) 880-3182 (Fax)


Robert D. Probasco

Thompson & Knight LLP ( email )

1700 Pacific Avenue
Dallas, TX 75201-7322
United States

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