What Is IRS Form 8918 and Who Must File It?

IRS Form 8918, the Material Advisor Disclosure Statement, is used by certain professionals to report specific financial transactions to the Internal Revenue Service. Its function is to provide the IRS with early information about potentially aggressive tax planning strategies. This disclosure requirement falls on the advisor who provides assistance or advice regarding the transaction, not on the taxpayer who participates in it.

Defining a Material Advisor

An individual or firm qualifies as a material advisor based on a two-part standard. First, the advisor must provide material aid, assistance, or advice regarding a reportable transaction. Second, a monetary threshold based on the gross income an advisor receives for their services must be met.

The specific amount depends on the client and transaction type. For most reportable transactions, the fees must exceed $50,000 for advice given to a natural person, or $250,000 for a business entity. These thresholds are lower for a “listed transaction,” which the IRS has flagged as potentially abusive. For a listed transaction, the income threshold is $10,000 for an individual and $25,000 for an entity.

Meeting both conditions triggers the requirement to file Form 8918. The income test is based on all fees received for the advice, including those for tax strategy and implementation services related to the transaction.

Identifying Reportable Transactions

The obligation to file Form 8918 is triggered by involvement with a “reportable transaction,” a term covering several categories of financial arrangements defined by the IRS to capture transactions with potential for tax avoidance. These categories include:

• Listed Transaction: A transaction that is the same as or substantially similar to one the IRS has officially identified in published guidance as a tax avoidance transaction.
• Confidential Transaction: A transaction offered under conditions of confidentiality that limit the taxpayer’s ability to disclose its tax treatment or structure, for which the advisor is paid a minimum fee.
• Transaction with Contractual Protection: A transaction where the taxpayer has the right to a refund of fees if the intended tax benefits are not sustained, or where fees are contingent on realizing tax benefits.
• Loss Transaction: A transaction resulting in a loss of a certain size under the Internal Revenue Code. For corporations, the threshold is at least $10 million in one year or $20 million combined. For individuals or partnerships, it is $2 million in one year or $4 million combined.
• Transaction of Interest: A transaction that the IRS believes has the potential for tax avoidance but lacks enough information to classify as a listed transaction.

Information Required for Form 8918

When preparing Form 8918, a material advisor must provide detailed information about themselves and the transaction. The form is structured to give the IRS a comprehensive overview and must be typed, not handwritten.

Part I of the form requires the material advisor’s identifying information, including their name, address, and taxpayer identification number. If the advisor is an entity, the form asks for the name and title of a specific contact person.

Part II focuses on the reportable transaction. The advisor must provide the name of the transaction, if any, and indicate which reportable transaction category it falls into. If the IRS has assigned a reportable transaction number from a previous disclosure, that number must be included.

The form also requires a detailed narrative description of the transaction. The advisor must explain its factual elements and its expected tax treatment and consequences, providing enough detail for the IRS to understand the arrangement.

Filing Procedures and Deadlines

The completed form must be submitted to the IRS Office of Tax Shelter Analysis (OTSA) in Ogden, Utah. The IRS also provides an option for submission through an electronic fax line, which can offer a more immediate and verifiable method of delivery.

The filing deadline is time-sensitive and is based on when the advisor officially becomes a material advisor. The form is due by the last day of the month that follows the end of the calendar quarter in which the advisor met the criteria. For example, if an advisor qualifies on February 10th, the Form 8918 would be due by April 30th.

The IRS does not send a confirmation of receipt, so it is recommended to send the form via a method that provides proof of mailing, such as certified mail. The IRS will process the form and mail the advisor a reportable transaction number. This number must then be provided to all taxpayers who participated in the transaction.

Penalties for Non-Compliance

Failing to file Form 8918 or filing an incomplete form can lead to substantial financial penalties under the Internal Revenue Code.

The amount of the penalty depends on the nature of the reportable transaction. For a failure to disclose a transaction that is not a listed transaction, the penalty is $50,000. This penalty applies to each individual failure to file for each reportable transaction.

If the failure to disclose involves a listed transaction, the penalty is significantly higher. In this case, the penalty is the greater of $200,000 or 50 percent of the gross income the advisor derived from their activity with respect to that transaction. For certain cases, this percentage can be as high as 75 percent.