What Form 8886 Is For

Form 8886 is a disclosure form that the IRS requires taxpayers to file when they participate in certain types of tax transactions that the government considers potentially aggressive or abusive. Think of it as a "heads-up" to the IRS that you've entered into a transaction with significant tax benefits that falls into specific categories the agency wants to monitor.

The IRS isn't necessarily saying these transactions are illegal—many are perfectly legitimate tax planning strategies. However, they want to know about them early so they can evaluate whether the tax benefits claimed are appropriate. By requiring disclosure, the IRS can identify patterns, spot potential abuse, and allocate examination resources more effectively. IRS.gov

Anyone who participates in a reportable transaction and files a federal tax return must file Form 8886—this includes individuals, trusts, estates, partnerships, S corporations, and regular corporations. Even if someone else (like your business partner or tax advisor) has already filed a disclosure for the same transaction, you still must file your own form. IRS.gov

When You’d Use Form 8886 (Including Late Filing and Amended Returns)

You must file Form 8886 with your tax return for any year in which you participated in a reportable transaction. "Participation" is broader than you might think—it includes the year you enter the transaction and every subsequent year that your tax return reflects tax consequences from that transaction.

Initial Filing

Attach Form 8886 to your original tax return for each year of participation. For the first year only, you must also send a separate copy to the IRS Office of Tax Shelter Analysis (OTSA) either by mail or fax. IRS.gov

Late Filing

If you discover you should have filed Form 8886 but didn't, you should file it as soon as possible to minimize penalties. Missing the deadline doesn't eliminate your filing obligation—it just adds significant penalties on top of any taxes owed. There is one exception: if you're a partner who receives your Schedule K-1 less than 10 days before your return's due date and only then discover you participated in a reportable transaction, you have 60 days after your filing deadline to submit Form 8886 to OTSA without being considered late. IRS.gov

Amended Returns

If you need to file an amended tax return and it involves a reportable transaction, you must attach Form 8886 to that amended return as well. Additionally, if a transaction you participated in later becomes designated as a "listed transaction" or "transaction of interest" after you've already filed your return, you have new filing obligations. For transactions entered into after August 2, 2007, you must file Form 8886 with OTSA within 90 days of the designation date. For older transactions, you must attach the form to your next filed tax return. IRS.gov

Key Rules or Details for 2020

Form 8886 applies to five categories of reportable transactions, each with specific criteria:

1. Listed Transactions: These are transactions the IRS has specifically identified as tax avoidance schemes. The IRS publishes and updates a list of these transactions in official notices. If your transaction is the same as or substantially similar to anything on this list, you must disclose it—no dollar thresholds apply. IRS.gov
2. Confidential Transactions: These involve transactions offered to you under conditions of confidentiality (meaning your advisor restricts your ability to disclose the tax strategy) AND for which you paid advisor fees of at least $50,000 (or $250,000 if you're a corporation). IRS.gov
3. Transactions With Contractual Protection: If you have the right to a full or partial refund of fees if the intended tax benefits aren't sustained, or if the fees are contingent on your actually realizing tax benefits, you must disclose the transaction. IRS.gov
4. Loss Transactions: These involve claiming losses under Section 165 of the tax code that meet specific dollar thresholds:
   • Individuals/trusts: At least $2 million in a single year or $4 million across multiple years (or at least $50,000 in one year if the loss comes from a foreign currency transaction)
   • Corporations: At least $10 million in a single year or $20 million across multiple years
   • Partnerships, S corporations, trusts: At least $2 million in a single year or $4 million across multiple years IRS.gov
5. Transactions of Interest: These are transactions the IRS has identified as potentially abusive but hasn't yet gathered enough information to designate as listed transactions. Like listed transactions, these are specifically published by the IRS. IRS.gov

Step-by-Step (High Level)

Step 1: Determine if You Must File

Review the five categories above and determine whether any transaction you participated in during the tax year meets the criteria. Remember, "participated" means your tax return reflects tax benefits or consequences from the transaction.

Step 2: Gather Information

Collect detailed information about the transaction, including: the name and tax identification number of all parties involved, a complete description of the transaction, the expected tax benefits, documentation of any confidentiality agreements or fee arrangements, and identification of which reportable transaction category applies.

Step 3: Complete Form 8886

Fill out the form completely and accurately. The IRS emphasizes that incomplete forms don't satisfy your disclosure obligation. You need to provide enough detail for the IRS to understand the tax structure and identify everyone involved. If you're filing multiple Forms 8886 with one return, number them sequentially. IRS.gov

Step 4: Attach to Your Tax Return

Include the completed Form 8886 with your tax return (Form 1040, 1065, 1120, etc.) when you file. If you file electronically, ensure the form is properly attached through your tax software.

Step 5: Send Copy to OTSA (First Year Only)

For the initial year you're disclosing a particular transaction, send an exact copy of Form 8886 to the Office of Tax Shelter Analysis. You can mail it to: Internal Revenue Service, Office of Tax Shelter Analysis, 1111 Constitution Avenue NW, Washington, DC 20224. Alternatively, as of 2020, you can fax it to 844-253-2553. If you filed electronically, the copy sent to OTSA must show exactly the same information, word for word, as the electronically filed version. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Incomplete Disclosures

Many taxpayers check boxes on the form but fail to provide detailed descriptions in the narrative sections. Simply writing "information available upon request" is explicitly not acceptable. The IRS has clarified that such statements don't constitute complete disclosure and won't protect you from penalties. IRS.gov
How to avoid: Provide comprehensive, detailed information about the transaction structure, all parties involved, and the specific expected tax benefits. Don't be vague or conclusory.

Mistake #2: Checking Boxes Without Supporting Information

Checking Line 7 (expected tax benefit criteria) without describing the tax benefits on Line 7e, or checking the confidential transaction box without describing the confidentiality provisions, results in an incomplete filing. IRS.gov
How to avoid: Ensure every box you check is supported by detailed narrative information in the form or in attached statements.

Mistake #3: Forgetting the OTSA Copy

Many taxpayers remember to attach Form 8886 to their tax return but forget to send the separate copy to the Office of Tax Shelter Analysis in the initial year. This is a separate requirement, and failing to comply results in penalties. IRS.gov
How to avoid: Create a checklist for reportable transaction filings that includes both the return attachment and the OTSA copy as separate items.

Mistake #4: Filing One Form for Multiple Different Transactions

While you can report multiple transactions that are "the same or substantially similar" on one form, you cannot lump together different types of transactions. Each distinct reportable transaction needs its own disclosure. IRS.gov
How to avoid: When in doubt, file separate forms. It's better to over-disclose with multiple forms than to under-disclose by combining distinct transactions.

Mistake #5: Misunderstanding "Participation"

Some taxpayers think they only need to file once, in the first year. However, you must file Form 8886 with every tax return that reflects participation in the reportable transaction—not just the first year. IRS.gov
How to avoid: Track reportable transactions across multiple years and include the required disclosure with each year's return until the transaction no longer affects your tax position.

What Happens After You File

Once you file Form 8886, the IRS adds the information to its database of reportable transactions. The Office of Tax Shelter Analysis analyzes the disclosures to identify trends, evaluate whether transactions should be challenged, and determine if new guidance or regulations are needed.

Does Filing Mean I’ll Be Audited?

Not necessarily. Filing Form 8886 doesn't automatically trigger an audit, but it does mean the IRS knows about your transaction and may scrutinize it more closely. The disclosure allows the IRS to make informed decisions about which returns to examine. IRS.gov

Statute of Limitations Considerations

Here's something critical to understand: if you participate in a listed transaction and fail to properly disclose it, the normal statute of limitations doesn't apply. The assessment period remains open indefinitely until you file a complete disclosure or until a material advisor provides the required information to the IRS. This means the IRS could audit and assess additional taxes many years after you thought the matter was closed. IRS.gov

Potential Follow-Up

The IRS may contact you requesting additional information about the disclosed transaction. You may receive an Information Document Request (IDR) asking for supporting documents, explanations, or clarification. Responding thoroughly and promptly to such requests is important.

Penalty Reduction Benefit

Proper disclosure does provide one significant benefit: if the IRS later determines you have a "reportable transaction understatement" (meaning you understated your tax due to the transaction), the penalty rate is 20% if you properly disclosed versus 30% if you didn't. That 10% difference can amount to substantial savings. IRS.gov

FAQs

Q1: What if I'm not sure whether my transaction is reportable?

If you're uncertain, consider filing a "protective" disclosure. However, a protective disclosure must still be complete—you can't just say "this might be reportable, I'll provide details if you ask." That won't protect you from penalties. When in doubt, consult with a qualified tax professional who has experience with reportable transactions. IRS.gov

Q2: What are the penalties for not filing Form 8886?

The penalties are substantial. Under Section 6707A, the penalty is 75% of any tax reduction resulting from the transaction, with minimums of $5,000 for individuals and $10,000 for all others. The maximum annual penalty for non-listed transactions is $10,000 (individuals) or $50,000 (others). For listed transactions, the maximum jumps to $100,000 (individuals) or $200,000 (others). These penalties apply per failure and are in addition to any other penalties or interest. IRS.gov

Q3: If my business partner or the partnership files Form 8886, do I still need to file?

Yes. Each taxpayer must file their own Form 8886. The fact that the partnership or another partner filed doesn't eliminate your personal filing requirement. The only exception is for certain pass-through entities where the transaction occurred entirely at the entity level and didn't require individual partner participation. IRS.gov

Q4: Can I file Form 8886 electronically?

Yes, if your tax software supports it, you can attach Form 8886 to your electronically filed return. However, remember that you still need to send a paper copy (or fax it) to OTSA for the initial year. The electronic and paper versions must match exactly. IRS.gov

Q5: What if I receive a Schedule K-1 late that shows I participated in a reportable transaction?

If you receive a timely Schedule K-1 less than 10 calendar days before your return's due date (including extensions), and it's only then that you learn about the reportable transaction participation, you won't be considered late if you file Form 8886 with OTSA within 60 days after your return's due date. IRS.gov

Q6: Do losses from a foreign currency transaction have different thresholds?

Yes. For individuals and trusts, a Section 165 loss from a Section 988 foreign currency transaction requires disclosure if it's at least $50,000 in a single tax year—much lower than the standard $2 million threshold for other types of losses. IRS.gov

Q7: Where can I find the current list of listed transactions and transactions of interest?

The IRS publishes these lists in official notices. As of 2020, Notice 2009-59 (and its successors) contains listed transactions, and Notice 2009-55 (and its successors) contains transactions of interest. These are available on IRS.gov, and you should review the most current versions to determine if your transaction is included. IRS.gov