IRS Narrows Definition of "Reportable Transactions" Subject to Mandatory Disclosure and List-Maintenance Rules

» Articles » Accounting Articles » Article

January 30, 2006

Taxpayers that participate in a reportable transaction must disclose such transaction to the Internal Revenue Service. Material advisors with respect to a reportable transaction must also disclose such transaction to the IRS and, in addition, maintain a list of investors that must be furnished to the IRS upon request. Substantial penalties apply both to taxpayers and material advisors for noncompliance.

Previously, there were six (6) categories of reportable transactions, i.e., (i) “listed” transactions, (ii) confidential transactions, (iii) transactions with contractual protection, (iv) loss transactions, (v) transactions with a significant book-tax difference, and (vi) transactions involving a brief asset holding period.[*] The IRS has prospectively removed the category of transactions with a significant book-tax difference.

Transactions with a significant book-tax difference generally were transactions that resulted in (or were reasonably expected to result in) more than a $10 million difference between federal income tax treatment and GAAP book treatment if either the company was subject to reporting under the Securities and Exchange Act of 1934 or had gross assets of at least $250 million for book purposes. (Certain types of book-tax differences, however, were specifically exempted by the IRS.)

Recently, the IRS released a new “Schedule M-3” that corporations with assets of $10 million or more must complete and file with their annual federal income tax return. The IRS also determined that the Schedule M-3 information would satisfy a taxpayer’s obligation to report transactions with a significant book-tax difference. The removal of the book-tax difference category, however, does not depend upon whether the taxpayer is subject to the Schedule M-3 filing requirement.

Continue reading below

FREE Accounting Training from Lorman

Lorman has over 35 years of professional training experience.
Join us for a special report and level up your Accounting knowledge!

Tax Aspects of Operating a Partnership-Taxed Organization
Presented by Langdon T. Owen Jr.

Learn More

The book-tax difference category could be especially problematic for material advisor reporting. Under current rules, material advisors are required to file reports with the IRS by the end of the month following the calendar quarter in which the reporting obligation arose. Often, taxpayers and their advisors were not able to quantify book-tax differences within this tight timeframe. The removal of the book-tax difference category of reportable transactions will eliminate this difficulty.

The removal of the significant book-tax difference category is effective for transactions that would otherwise have to be disclosed by taxpayers or material advisors on or after January 6, 2006, or for which investor lists should have been prepared and maintained by material advisors beginning on or after that date. However, neither taxpayers nor material advisors are relieved of any disclosure or list-maintenance obligation for transactions that should have been disclosed, or for which investor lists should have been prepared and maintained, prior to that date; nor are taxpayers relieved of any otherwise applicable obligation to file a Schedule M-3.

The material appearing in this web site is for informational purposes only and is not legal advice. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. The information provided herein is intended only as general information which may or may not reflect the most current developments. Although these materials may be prepared by professionals, they should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

The opinions or viewpoints expressed herein do not necessarily reflect those of Lorman Education Services. All materials and content were prepared by persons and/or entities other than Lorman Education Services, and said other persons and/or entities are solely responsible for their content.

Any links to other web sites are not intended to be referrals or endorsements of these sites. The links provided are maintained by the respective organizations, and they are solely responsible for the content of their own sites.