What Are Listed Transactions and How to Report Them?

A listed transaction is a specific arrangement that the Internal Revenue Service (IRS) has officially identified as a tax avoidance scheme. These are not legitimate tax planning strategies but are viewed by the government as improper methods to reduce tax liability. The IRS requires individuals and entities who participate in them to disclose their involvement, which helps the agency track and combat abusive tax shelters. When the IRS designates a transaction as “listed,” it issues formal published guidance, such as a notice or regulation. This official identification signals that the IRS believes the transaction has a significant potential for tax evasion or avoidance, and participation carries substantial reporting obligations and increases the likelihood of an IRS examination.

Understanding Reportable Transactions

The term “reportable transaction” is a broad classification for arrangements that taxpayers must disclose to the IRS under Treasury Regulation § 1.6011-4. This disclosure provides the government with information about transactions that have tax avoidance potential. A listed transaction is the most prominent category, but several other types of activities also require formal reporting.

Beyond listed transactions, other categories of reportable transactions include:

• A Transaction of Interest, which the IRS believes has the potential for tax avoidance but requires more information to make a final determination.
• A Confidential Transaction, an arrangement offered under conditions of secrecy where an advisor limits the taxpayer’s ability to disclose the tax structure.
• A Transaction with Contractual Protection, which includes arrangements where a taxpayer has the right to a refund of fees if the intended tax benefits are not sustained.
• A Loss Transaction, which involves claiming a loss of a certain type and amount under Internal Revenue Code (IRC) Section 165.

While all these categories require disclosure, listed transactions are the most scrutinized because the IRS has already formally determined them to be improper tax avoidance schemes through published guidance.

Identifying Specific Listed Transactions

One example involves abusive micro-captive insurance arrangements. In a legitimate captive insurance company, a business sets up its own insurance subsidiary to cover its risks. The abusive structure generates improper tax deductions by creating contracts for implausible risks that do not represent genuine insurance, then distributing untaxed premiums back to the owners. The IRS targets these when they lack genuine risk distribution and shifting.

Another listed transaction involves syndicated conservation easements. In these schemes, promoters sell shares of land to investors and donate an easement based on an inflated appraisal. This allows investors to claim a charitable deduction far greater than their investment. A legitimate conservation easement involves a property owner restricting land use for conservation in exchange for a fair tax deduction.

A historical example is the “Son of BOSS” (Bond and Option Sales Strategy) transaction, a complex scheme from the late 1990s. It was designed to create large, artificial tax losses to offset legitimate gains. The scheme involved a series of pre-planned steps using partnerships and foreign currency to generate a high basis in an asset that had a low actual value, which was then sold to create a paper loss. The IRS identified Son of BOSS as a listed transaction in Notice 2000-44, leading to extensive litigation.

Disclosure Requirements for Taxpayers

Any taxpayer who participates in a listed transaction, including individuals, trusts, partnerships, and corporations, must disclose their involvement to the IRS. The disclosure is made using Form 8886, Reportable Transaction Disclosure Statement. This form is used for all reportable transaction categories but is especially important for listed transactions.

To complete Form 8886, the taxpayer must identify the transaction by its official name and number from the relevant IRS notice. The form requires a factual description of all steps involved and an explanation of the expected tax consequences.

Taxpayers must also quantify the tax benefits they claimed or expected from the arrangement. This includes deductions, losses, credits, or any other reduction in tax liability for all years of participation. Furthermore, Form 8886 requires the identification of all other parties involved in the transaction, such as promoters and advisors, which helps the IRS map the network of firms facilitating these schemes.

If a transaction is designated as “listed” after a taxpayer has filed a return, a special rule applies. The taxpayer must file Form 8886 with the IRS Office of Tax Shelter Analysis (OTSA) within 90 calendar days of the date the transaction was officially listed. This ensures the IRS receives timely information about retroactively identified transactions.

The Filing Process for Form 8886

The submission process for Form 8886 is a two-part procedure. A taxpayer cannot simply file it with their annual tax return alone. The regulations mandate a dual-filing requirement to ensure the information is processed by the correct IRS departments.

First, a copy of Form 8886 must be mailed to the IRS Office of Tax Shelter Analysis (OTSA). The mailing address is: Internal Revenue Service, OTSA, Mail Stop 4915, 1973 North Rulon White Boulevard, Ogden, UT 84404. This step is only required for the first year a taxpayer discloses participation in a specific transaction.

Second, another identical copy of Form 8886 must be attached to the taxpayer’s federal income tax return for every year in which they participate in the transaction. For example, if a transaction provides tax benefits over three years, a copy of the form must be attached to the tax return for each of those years. If the transaction results in a loss that is carried back to a prior year, a copy must also be attached to the amended return or application for a tentative refund for that earlier year.

Taxpayers should not expect an acknowledgment of receipt after filing. Filing Form 8886 may increase the probability of an audit, as it alerts the IRS to participation in a transaction it considers abusive. The disclosure does not protect the claimed tax benefits but is required to avoid non-disclosure penalties.

Penalties for Non-Disclosure

Failing to file Form 8886 for a listed transaction results in severe financial consequences under Internal Revenue Code Section 6707A. These penalties are applied for each failure to disclose and are separate from any taxes, interest, or other penalties resulting from the disallowance of the transaction’s tax benefits.

For a listed transaction, the penalty is 75% of the decrease in tax resulting from the transaction. It is subject to a minimum penalty of $5,000 for an individual and $10,000 for an entity. The maximum penalty is $100,000 for an individual and $200,000 for an entity, and it applies for each failure to disclose for each year of participation.

The penalty is for the failure to disclose, not for the tax deficiency itself. This means a taxpayer can face a penalty for not filing Form 8886 even if the transaction does not result in an underpayment of tax. The IRS views the act of hiding participation in these schemes as a serious offense. The IRS also has very limited authority to rescind this penalty once it is assessed.