Form 8918: Material Advisor Disclosure Statement

The Internal Revenue Service (IRS) uses Form 8918, the Material Advisor Disclosure Statement, to gather information about specific types of transactions that may have the potential for tax avoidance. This form is a disclosure tool, not an admission of wrongdoing, but it provides the agency with a mechanism to monitor tax strategies. It requires certain individuals and firms who provide tax-related advice to report their involvement in these transactions. The information collected helps the IRS identify new tax strategies and determine whether further examination is warranted.

Determining Material Advisor Status

An individual or firm qualifies as a material advisor based on a two-part test defined in Internal Revenue Code Section 6111. The first part of the test is met if the person provides “material aid, assistance, or advice” concerning the organization, management, promotion, or implementation of a reportable transaction. This standard can encompass a wide range of professional services related to the transaction’s structure and expected tax outcomes.

The second part of the test involves a specific income threshold. A person is considered a material advisor only if they directly or indirectly derive gross income exceeding a certain amount for their advisory services. For transactions where substantially all of the tax benefits are intended for natural persons, the fee threshold is $50,000. In all other cases, such as transactions primarily benefiting corporations, the threshold is $250,000. Both conditions must be met for the filing requirement to apply.

Identifying Reportable Transactions

The obligation to file Form 8918 is triggered by involvement with a “reportable transaction.” These are not necessarily illegal, but they are transactions that the IRS has identified as having the potential for tax avoidance or evasion. Treasury Regulation §1.6011-4 outlines five distinct categories of reportable transactions that advisors must recognize.

• Listed Transactions are the same as, or substantially similar to, one that the IRS has specifically identified in published guidance as a tax avoidance transaction. An example is a syndicated conservation easement, where promotional materials suggest investors can obtain a deduction that far exceeds their investment.
• Confidential Transactions are those offered under conditions of confidentiality that limit the taxpayer’s disclosure of the transaction’s tax treatment or structure, often accompanied by a minimum fee. For instance, if an advisor provides a tax strategy but contractually prohibits the client from discussing its details with another advisor, it could be classified as confidential.
• Transactions with Contractual Protection applies if the taxpayer has the right to a full or partial refund of fees if the intended tax benefits are not sustained upon an IRS challenge. It also includes arrangements where the advisor’s fees are contingent on the taxpayer’s realization of tax benefits. An example is a fee agreement where a portion of the fee is returned if the IRS disallows a claimed deduction.
• Loss Transactions are defined by monetary thresholds of losses generated under IRC Section 165. For individuals, a loss transaction occurs if they claim a loss of at least $2 million in a single tax year or $4 million over any combination of tax years. For corporations, the thresholds are $10 million in a single tax year or $20 million over any combination of tax years.
• Transactions of Interest are those the IRS and Treasury believe have the potential for tax avoidance but for which they lack sufficient information to determine if they should be identified as listed transactions. This category allows the IRS to gather more data on emerging issues.

Information Required for Form 8918

Completing Form 8918 requires gathering specific details about the advisor, the transaction, and the taxpayers involved. Part I, Material Advisor Information, requires the advisor’s name, address, and Taxpayer Identification Number (TIN). If the advisor is an entity, contact information for a specific person must also be provided.

Part II focuses on the Reportable Transaction Information. This section requires a detailed description of the transaction, including its name, the expected tax treatment, and all potential tax benefits. The advisor must also identify the reportable transaction category and provide any assigned reportable transaction number if one has been previously issued.

Part III, Taxpayer Information, requires the advisor to list the names and TINs of the taxpayers to whom they provided material aid or advice. The form also asks for the date on which each taxpayer entered into the transaction. This information helps the IRS cross-reference the advisor’s disclosure with the taxpayer’s own reporting obligations on Form 8886, Reportable Transaction Disclosure Statement.

Part IV asks for information on any Other Material Advisors known to be involved in the transaction. If the filing advisor is aware of other individuals or firms who also meet the material advisor criteria for the same transaction, their names and identifying numbers must be included.

Filing Procedures and Deadlines

The form must be filed with the IRS by the last day of the month that follows the end of the calendar quarter in which the person becomes a material advisor. This means an advisor must quickly recognize when their activities and compensation cross the defined thresholds to ensure timely submission.

The form must be sent to a dedicated IRS unit. All Forms 8918 are mailed to the IRS Office of Tax Shelter Analysis in Ogden, UT. The IRS instructions for the form provide the specific post office box for this purpose, and using this address is important to avoid processing delays.

To facilitate faster processing and receipt of a reportable transaction number, advisors are encouraged to use the electronic fax submission method detailed in the form’s instructions. Only the most current version of the form should be used. Filing an incomplete or outdated version will result in its rejection, necessitating a new, correct submission.

Penalties for Non-Compliance

Failure to comply with the Form 8918 filing requirements carries financial consequences as outlined in IRC Section 6707. The law imposes a penalty on any material advisor who fails to file the form by the prescribed deadline or who files a form that is false or incomplete. These penalties are applied on a per-transaction basis, meaning a separate penalty can be assessed for each failure to disclose a reportable transaction.

For most reportable transactions, the penalty for non-compliance is $50,000. This fixed amount applies regardless of the income the advisor derived from the transaction.

The penalty increases if the failure to file relates to a listed transaction. In such cases, the penalty is the greater of $200,000 or 50% of the gross income the material advisor derived from providing aid, assistance, or advice regarding that transaction. If the failure to disclose a listed transaction is determined to be intentional, the percentage of gross income used in the calculation jumps to 75%.