(IRS) Form 8886 instructions 2017/2018
- What is federal form 8886?
- How to decide whether the transaction is reportable or not?
- Categories of reportable transactions
- How to fill in the form 8886?
- Form 8886 – penalties
- Form 8886 filing requirements
- Form 8886 Example
What is federal form 8886?
How to decide whether the transaction is reportable or not?
According to currently applicable regulations, there are a few categories of reportable transactions. If the ones that the company has participated in fall into one or more of the categories indicated in the regulations, it means that it has to file the form 8886 and disclose the information about effected transactions to the Internal Revenue Service.
Categories of reportable transactions
The categories of reportable transactions include listed, loss and confidential transactions, as well as transactions with contractual protection and transactions of interest. The first one, a listed transaction, has the same or similar features to tax avoidance transaction. A loss transaction occurs when the company can claim a loss pursuant to section 165. However, the amount of the loss has been determined and varies according to the type of company. A confidential transaction is offered to the company pursuant to the condition of confidentiality and, in addition, the company had to pay a remuneration to an associated party or an advisor. The transaction with contractual protection is a type of trade, where the company pays the fee but it has a right to receive a full or partial reimbursement of this fee if all or part of intended tax consequences arising from the trade are not sustained or the fee is contingent. A transaction of interest has been defined by the Internal Revenue Service as the one that has a potential for tax evasion or avoidance, however, it cannot be clearly indicated whether there are enough data to state if it can be identified as a tax avoidance transaction.
Although the regulations specify which categories of transactions should be treated as reportable and thus should be disclosed with the use of the form 8886, there are certain exceptions, which can be found in the published guidance. Therefore the analysis aimed at determining whether the transaction is reportable has to be carried out very carefully.
How to fill in the form 8886?
The form can include one or more reportable transactions, provided that they are substantially similar to each other, which means they result in the same or very similar tax consequences or the tax strategy that is used to effect them is the same or very similar.
At the beginning of the form, the taxpayer has to give their personal details. If the individual submits the form, he or she has to give the first and last name, as well as middle initial, whereas in case of the company, we have to provide its name and identifying number at the top of the form. Then the details of the address have to be filled in, like the number, street and room or suite number, name of the city, state and zip code. The information has to be consistent with the data given on the tax return.
If the company submits more than one form 8886 together with its tax return, it has to number each form in sequence and provide a number of statement. Next, we have to give the number of the tax return, which the form 8886 accompanies or is associated with, as well as the year of this tax return. If it is a calendar year, we only have to provide the year for which it has been stated, but if it is a fiscal year, we have to give the month, day and year on which the fiscal year finished.
In item C, there are two options we have to choose from. If we file the form for the first time, we should tick option “initial year filer”, and if we want the information that we disclose to stay confidential, we should tick the option “protective disclosure”.
In the next part of the form 8886, we have to provide the details of the transaction than is subject to the reporting requirement. First it is necessary to enter the name under which the transaction is identified or referred to. If it does not have a name, we should briefly describe it and make it distinguishable from other transactions the company took part in. Then the first year when the transaction was effected has to be provided. In the field “reportable transaction or tax shelter registration number”, we should enter the number having nine or eleven digits, which constitutes a reference number of the transaction in question.
As was mentioned earlier, it is possible to report more than one transaction using one form. In this case, we have to provide the names and numbers of all transactions we want to include, but if there is too little space for that, we should attach a list with all reportable transaction we or our company participated in, and refer to the list each time the name or number has to be provided.
In point 2 of box C, we need to specify what category the transaction we report falls within, whether is has been a listed, confidential, contractual protection, loss or transaction of interest. Additionally, if the transaction is listed or it is a transaction of interest, we should provide the published guidance number for it. Next we should enter the information on whether our company has taken part in it through a partnership, S corporation, trust or foreign entity. If the answer is yes, we have to enter the details of the intermediary, including its name, Employer Identification Number and the date we have obtained the Schedule K-1 from this entity. In case of two entities, we can provide their data on the same form, but if there are more, we have to enclose an additional list.
In line six we have to enter the details of the company that promoted, solicited or recommended that you take part in the transaction and you paid this company the remuneration for it. In addition to the name and address of the company, we have to enter its social security or national identification number, and the amount of the fee we paid to it on account of remuneration. Again, if there are a few such companies, we cannot enter each of them on one form 8886 but we have to enclose an additional list of such entities.
The reportable transactions usually result in obtaining the tax benefit. In the field 7a we are required to specify what kind of tax benefit the transaction has generated. We can choose from deduction, capital or ordinary loss, exclusion from gross income, adjustments to basis or the lack thereof, non-recognition of gain, tax credits, deferral. In case we are entitled to receive another type of tax benefit, which has not been included in the list, we have to check the box “other”. However, if the transaction has generated more than one tax benefit, we have to tick all that apply. In the next line, 7b, it is necessary to specify the amount of tax benefit as well as give some more details about it, step by step. In the description, we have to inform what different entities have also taken part in the transaction and the agreements they have concluded, as well as the tax result protection which arises from the transaction in question. We should also enter the assumptions and satisfaction of liabilities, sales or interests in property, as well as the establishment or dissolution of entities. Of course, we should provide only the information that is known to us.
Next we have to provide details of every individual, foreign and related entities, which have been engaged in the transaction. The details include their name, address, social security or employer identification number. If the entity has been established outside the territory of the United States of America, we have to include the information about the country it is based in. And in the case of related entities or individuals, we have to specify what kind of relation it is. Again, in the case of a bigger number of entities the data of which we must give, we have to enclose an additional list of individuals and companies.
Form 8886 – penalties
The submission of the form 8886 is mandatory. Every reportable transaction, subject to exceptions, we have participated in has to be disclosed in accordance with section 6011 of the U.S. Code. If we fail to comply with this requirement, we will have to pay a penalty in the amount of seventy five percent of the reduction in the tax that we have reported on the income tax return, in consequence of taking part in the transaction or the reduction the company would be entitled to if the transaction were respected for tax purposes. However, the amount of penalty will not be lower than $ 5,000 and higher than $ 10,000 if the failure is attributable to an individual, and will be within the range of $ 10,000 to $ 50,000 if it is attributable to an entity. The only exception here is the listed transaction, if it is not reported with the use of the form 8886, the penalty may be $ 100,000 (for an individual) or $ 200,000 (for any other entity). The regulations also provide for the penalty in the case the taxpayer understated the amount of reportable transaction.
Form 8886 filing requirements
The Form 8886 has to be submitted together with the income tax return or information return for every year an individual or a company took part in the transaction that has to be reported. In case you are filing the form 8886 for the first time, it has to be also submitted to the Office of Tax Shelter Analysis, based at 1973 Rulon White Boulevard in Ogden, Utah 84201. There are also special filing rules for shareholders in S corporation, partners in partnerships, and beneficiaries of trust, who obtain the Schedule K-1 within the time period less than ten days before the deadline for the submission of tax return, and it arises from the schedule that the entity or individual took part in a reportable transaction. In this case a person has sixty days from the receipt of the schedule to file the form 8886.
Form 8886 Example: