Form 8886 (Rev. October 2022) – 2020 Tax Year Checklist
Form 8886 Disclosure Requirements
Taxpayers must file Form 8886 to report participation in specific categories of reportable transactions, including listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest. The October 2022 revision establishes the current standards for preparing and submitting these disclosure statements for any applicable tax year. Section 6707A imposes penalties when taxpayers fail to file Form 8886 or submit incomplete disclosures, and these penalties apply even when the IRS ultimately accepts the transaction's tax treatment as valid.
Penalty Structure Under Section 6707A
Section 6707A imposes a penalty equal to 75 percent of the tax decrease shown on the return as a result of the transaction. This calculation applies whether the transaction is respected for federal tax purposes or not. Minimum and maximum penalty thresholds vary based on transaction type and taxpayer classification.
Listed transactions trigger the following penalty rules:
- Individuals face a minimum penalty of $5,000, while all other taxpayers face a minimum of $10,000.
- Maximum annual penalties reach $100,000 for individuals and $200,000 for other entities.
- Each failure to disclose generates a separate penalty assessment, and the Internal Revenue Service imposes these amounts even when taxpayers ultimately owe no additional tax.
Reportable transactions other than listed transactions follow different limits:
- Minimum penalties remain at $5,000 for individuals and $10,000 for all other taxpayers.
- Annual penalty maximums are $10,000 for individuals and $50,000 for other entities.
This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
- Penalties apply whether you fail to file Form 8886, submit an incomplete form, or provide incorrect information.
Loss Transaction Thresholds
A loss transaction requires disclosure when section 165 losses equal or exceed specific threshold amounts. These thresholds vary based on entity type and apply to losses claimed under section 165, including amounts deductible under provisions that treat transactions as sales or other dispositions.
Individual and Trust Thresholds
- Single-year losses of $2 million or combined losses of $4 million across multiple tax years trigger disclosure requirements.
- Foreign currency transaction losses under section 988 require disclosure when they reach $50,000 in a single tax year.
Corporation Thresholds Excluding S Corporations
- Losses of $10 million in a single tax year or $20 million across any combination of tax years trigger mandatory disclosure.
Partnership and S Corporation Thresholds
- Partnerships and S corporations without exclusively C corporation partners must disclose losses of $2 million in a single year or $4 million across multiple years.
- Partnerships with only C corporation partners must disclose losses of $10 million in a single year or $20 million across any combination of years.
Loss Aggregation Period
When determining whether losses meet threshold amounts over multiple years, combine only losses claimed in the tax year the transaction begins and the five succeeding tax years. Losses from prior years do not count toward the aggregation total. Section 165 losses do not include offsetting gains, other income, or limitations, and the full loss amount applies in the year sustained, regardless of net operating loss or net capital loss carryback or carryover treatment.
This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
Confidential Transaction Requirements
A confidential transaction occurs when an advisor offers the transaction under conditions of confidentiality and the taxpayer or a related party pays a minimum fee. Confidentiality exists when the advisor limits disclosure of the tax treatment or tax structure, protecting the advisor's tax strategies. The confidentiality restriction need not be legally binding to trigger reporting requirements.
Minimum fee thresholds vary by taxpayer type:
- C corporations and partnerships or trusts with only C corporation owners or beneficiaries face a minimum fee threshold of $250,000.
- All other taxpayers, including individuals, S corporations, and mixed partnerships or trusts, face a minimum fee threshold of $50,000.
- Fees include all payments for tax strategy, advice, implementation, documentation, and unreasonable return preparation charges, regardless of payment form.
Transactions With Contractual Protection
You must disclose a transaction with contractual protection when you or a related party has the right to a full or partial fee refund if the intended tax consequences are not sustained. Transactions requiring disclosure also include those with fees contingent on tax benefit realization. All facts and circumstances determine whether a fee is refundable or contingent, including reimbursement rights for amounts not designated as fees and agreements to provide services without compensation.
Filing Requirements and Procedures
Annual Filing Obligation
- Attach Form 8886 to your income tax return or information return for each tax year in which you participate in a reportable transaction.
- File amended returns with Form 8886 when reportable transaction participation affects previously filed returns.
- Submit Form 8886 with applications for a tentative refund when reportable transactions result in loss or credit carrybacks.
Initial Year OTSA Submission
- Mail or fax an exact copy of Form 8886 to the Office of Tax Shelter Analysis when filing for the first year of a reportable transaction.
- Send mail submissions to Internal Revenue Service, OTSA Mail Stop 4915, 1973 Rulon White Blvd., Ogden, UT 84201.
- Send fax submissions to 844-253-2553 with a cover sheet listing subject, sender information, taxpayer name, date, and page count.
- Submit only one exact copy per fax transmission with a maximum of 100 pages.
- Exclude social security numbers or employer identification numbers from fax cover sheets.
Pass-Through Entity 60-Day Extension
- Partners, shareholders, or beneficiaries who receive timely Schedule K-1 less than 10 calendar days before their return due date may file Form 8886 with the Office of Tax Shelter Analysis within 60 days after their return due date without penalty.
- The original return must be filed timely without Form 8886 to qualify for this extension.
- This extension applies only when the late Schedule K-1 receipt causes the taxpayer to discover reportable transaction participation.
Completion Requirements
Form 8886 must be completed in its entirety with all required attachments. Line 7e requires a full description of the transaction structure, all steps, dates, amounts, parties, tax result protection, and economic or business reasons. Do not write statements such as “Information provided upon request” or “Details available upon request,” as these phrases render the disclosure incomplete and trigger penalties.
Protective disclosure filings may check the protective disclosure box under Regulations section 1.6011-4(f), but protective disclosures must include all required information in complete form. The Internal Revenue Service treats protective disclosures no differently from standard filings for purposes of completeness requirements. Electronic return filers must ensure the Office of Tax Shelter Analysis copy matches the electronically filed return exactly, word for word, on official Internal Revenue Service Form 8886 or an exact reproduction.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
