File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

1040z

Need To Amend 2011 Tax ReturnH&r Block Military TaxesHow To File Taxes Online For Free 2011Amend A Tax Return1040x Online FreeFree Tax FiingFiling Past Tax ReturnsHow To Amend My TaxesFile 1040 Ez OnlineFree State E File TaxesHow Do I File An Amended Return For 2012How To File A Amended Tax ReturnFree Tax Preparation H&r Block1040ez File On LineCan I Amend My 2009 Tax ReturnFiling/late Taxes For 2012Hrblock2011 Tax Form 1040AmendedHow To E File State Taxes For FreeIrs 1040ez FormsIrs Tax Form 1040ez 2011Nj 1040nr 2011Tax Planning Us 2006 TaxesIrs Forms20111040ez 2014Free File State TaxesHow To Do An Amendment Tax Return1040ez 2013 FormMilitary Tax Deductions2010 Taxes Online1040 Ez Forms 2014Irs 1040v FormFile 1040ez Electronically1040ez Tax Form BookletHow To Do 2012 Taxes1040ez For 2011Taxes HrblockCan I Efile A 2011 Tax ReturnCan You Refile Taxes

1040z

1040z Publication 515 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionOrdering forms and publications. 1040z Tax questions. 1040z Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 515, such as legislation enacted after it was published, go to www. 1040z irs. 1040z gov/pub515. 1040z What's New Deposit interest paid to certain nonresident alien individuals. 1040z  New rules apply to reporting of deposit interest paid to certain nonresident alien individuals on or after January 1, 2013. 1040z Deposit interest of $10 or more paid to certain nonresident alien individuals must be reported on Form 1042–S. 1040z See Deposit interest paid to certain nonresident alien individuals in 2013. 1040z Portfolio interest. 1040z . 1040z  The rules determining whether interest is considered portfolio interest changed for obligations issued after March 18, 2012. 1040z Generally, interest paid on nonregistered (bearer) bonds will not be treated as portfolio interest. 1040z See Portfolio interest. 1040z U. 1040z S. 1040z real property interest. 1040z  Generally, the treatment of a regulated investment company (RIC) as a qualified investment entity (QIE) was scheduled to expire at the end of 2011. 1040z The provision has been extended through 2013. 1040z The special rules that apply to distributions from a QIE attributable to the gain from the sale or exchange of a U. 1040z S. 1040z real property interest will continue to apply to any distribution from a RIC. 1040z See Qualified investment entities under U. 1040z S. 1040z Real Property Interest. 1040z Interest-related dividends and short-term capital gain dividends received from mutual funds. 1040z  The exemption from withholding on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company was scheduled to expire at the end of 2011. 1040z These provisions have been extended through 2013. 1040z Partnership withholding rate on effectively connected income. 1040z  For 2013, the rate for withholding on noncorporate partners has increased to 39. 1040z 6%. 1040z The rate for corporate partners remains 35%. 1040z Reminders Exemption from requirement to withhold for certain payments to qualified securities lenders. 1040z  If you made U. 1040z S. 1040z -source substitute dividend payments to qualified securities lenders, and these payments are part of a chain of substitute dividend payments, you may be exempt from withholding tax on the payments. 1040z See Amounts paid to qualified securities lenders . 1040z Electronic deposits. 1040z  You must make all deposits of taxes electronically. 1040z Substitute forms. 1040z  Any substitute forms you use must comply with the requirements in Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. 1040z If they do not, the forms may be rejected as incorrect and the IRS may impose penalties. 1040z See Penalties. 1040z Filing electronically. 1040z  If you file Form 1042-S electronically, you will use the Filing Information Returns Electronically (FIRE) system. 1040z You get to the system through the Internet at fire. 1040z irs. 1040z gov. 1040z For files submitted on the FIRE system, it is the responsibility of the filer to verify the results of the transmission within 5 business days. 1040z The IRS will not mail error reports for files that are bad. 1040z Qualified intermediaries. 1040z  A branch of a financial institution may not act as a qualified intermediary in a country that does not have approved know-your-customer rules. 1040z See Qualified intermediary under Foreign Intermediaries. 1040z Requests for extensions on Form 8809 must be filed electronically. 1040z  Requests on Form 8809 for an extension of time to file Form 1042–S must be made electronically if the request is for more than one payer. 1040z See Extension to file Form 1042-S with the IRS. 1040z Photographs of missing children. 1040z  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 1040z Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 1040z You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 1040z Introduction This publication is for withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations. 1040z Specifically, it describes the persons responsible for withholding (withholding agents), the types of income subject to withholding, and the information return and tax return filing obligations of withholding agents. 1040z In addition to discussing the rules that apply generally to payments of U. 1040z S. 1040z source income to foreign persons, it also contains sections on the withholding that applies to the disposition of U. 1040z S. 1040z real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U. 1040z S. 1040z trade or business. 1040z Beginning in 2014, additional withholding rules become effective under Chapter 4 of the Internal Revenue Code as added by the Foreign Account Tax Compliance Act (FATCA). 1040z U. 1040z S. 1040z withholding agents will be required to withhold on certain types of payments made to foreign financial institutions that do not enter into an agreement with the IRS. 1040z For information on these provisions, go to www. 1040z irs. 1040z gov/fatca. 1040z Comments and suggestions. 1040z   We welcome your comments about this publication and your suggestions for future editions. 1040z   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. 1040z NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 1040z Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 1040z   You can email us at taxforms@irs. 1040z gov. 1040z Please put “Publications Comment” on the subject line. 1040z You can also send us comments from www. 1040z irs. 1040z gov/formspubs/. 1040z Select “Comment on Tax Forms and Publications” under “Information About. 1040z ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 1040z Ordering forms and publications. 1040z   Visit www. 1040z irs. 1040z gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 1040z Internal Revenue Service 1201 N. 1040z Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 1040z   If you have a tax question, check the information available on IRS. 1040z gov or call 1-800-829-1040. 1040z We cannot answer tax questions sent to either of the above addresses. 1040z Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits 51 (Circular A), Agricultural Employer's Tax Guide 519 U. 1040z S. 1040z Tax Guide for Aliens 901 U. 1040z S. 1040z Tax Treaties Form (and Instructions) SS-4 Application for Employer Identification Number W-2 Wage and Tax Statement W-4 Employee's Withholding Allowance Certificate W-4P Withholding Certificate for Pension or Annuity Payments W-7 Application for IRS Individual Taxpayer Identification Number W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding W-8ECI Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States W-8EXP Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding W-8IMY Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. 1040z S. 1040z Branches for United States Tax Withholding 941 Employer's QUARTERLY Federal Tax Return 1042 Annual Withholding Tax Return for U. 1040z S. 1040z Source Income of Foreign Persons 1042-S Foreign Person's U. 1040z S. 1040z Source Income Subject to Withholding 1042-T Annual Summary and Transmittal of Forms 1042-S See How To Get Tax Help at the end of this publication, for information about getting publications and forms. 1040z Prev  Up  Next   Home   More Online Publications
Español

Family, Health and Safety

The 1040z

1040z 2. 1040z   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. 1040z ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. 1040z In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. 1040z Those cases are called “abusive tax shelters. 1040z ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. 1040z Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . 1040z Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 1040z Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. 1040z They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. 1040z Despite appearances to the contrary, the taxpayer generally risks little. 1040z Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. 1040z Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. 1040z (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. 1040z ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. 1040z This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. 1040z Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. 1040z However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. 1040z Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. 1040z These provisions include the following. 1040z Disclosure of reportable transactions. 1040z   You must disclose information for each reportable transaction in which you participate. 1040z See Reportable Transaction Disclosure Statement , later. 1040z   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. 1040z To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. 1040z   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. 1040z They must provide this number to all persons to whom they acted as a material advisor. 1040z They must provide the number at the time the transaction is entered into. 1040z If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. 1040z For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. 1040z Requirement to maintain list. 1040z   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. 1040z The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. 1040z See Regulations section 301. 1040z 6112-1 for more information (including what information is required to be included on the list). 1040z Confidentiality privilege. 1040z   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. 1040z Appraisal requirement for donated property. 1040z   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. 1040z If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. 1040z If you file electronically, see Form 8453, U. 1040z S. 1040z Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. 1040z For more information about appraisals, including exceptions, see Publication 561. 1040z Passive activity loss and credit limits. 1040z   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. 1040z For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. 1040z Interest on penalties. 1040z   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. 1040z Accounting method restriction. 1040z   Tax shelters generally cannot use the cash method of accounting. 1040z Uniform capitalization rules. 1040z   The uniform capitalization rules generally apply to producing property or acquiring it for resale. 1040z Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. 1040z For more information, see Publication 538. 1040z Denial of deduction for interest on an underpayment due to a reportable transaction. 1040z   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. 1040z This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. 1040z Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. 1040z The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. 1040z Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. 1040z So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. 1040z In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. 1040z The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. 1040z Investor Reporting You may be required to file a reportable transaction disclosure statement. 1040z Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. 1040z Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. 1040z Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). 1040z In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. 1040z  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. 1040z If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. 1040z If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. 1040z See Penalty for failure to disclose a reportable transaction , later under Penalties. 1040z The following discussion briefly describes reportable transactions. 1040z For more details, see the Instructions for Form 8886. 1040z Reportable transaction. 1040z   A reportable transaction is any of the following. 1040z A listed transaction. 1040z A confidential transaction. 1040z A transaction with contractual protection. 1040z A loss transaction. 1040z A transaction of interest entered into after November 1, 2006. 1040z Note. 1040z Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. 1040z Listed transaction. 1040z   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. 1040z These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. 1040z For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. 1040z irs. 1040z gov/irb/2009-31_IRB/ar07. 1040z html. 1040z Confidential transaction. 1040z   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. 1040z A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. 1040z The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. 1040z Transaction with contractual protection. 1040z   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. 1040z For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. 1040z irs. 1040z gov/irb/2007-07_IRB/ar15. 1040z html. 1040z Loss transaction. 1040z   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. 1040z A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. 1040z   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. 1040z For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. 1040z irs. 1040z gov/irb/2004-50_IRB/ar11. 1040z html. 1040z Transaction of interest. 1040z   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. 1040z The IRS has identified the following transactions of interest. 1040z “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. 1040z R. 1040z B. 1040z 545, available at www. 1040z irs. 1040z gov/irb/2007-36_IRB/ar20. 1040z html. 1040z Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. 1040z R. 1040z B. 1040z 544, available at www. 1040z irs. 1040z gov/irb/2007-36_IRB/ar19. 1040z html. 1040z Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. 1040z R. 1040z B. 1040z 1194, available at www. 1040z irs. 1040z gov/irb/2008-47_IRB/ar11. 1040z html. 1040z Certain transactions involving a U. 1040z S. 1040z taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. 1040z R. 1040z B. 1040z 312, available at www. 1040z irs. 1040z gov/irb/2009-03_IRB/ar10. 1040z html. 1040z   For updates to this list, go to www. 1040z irs. 1040z gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. 1040z Penalties Investing in an abusive tax shelter may lead to substantial expenses. 1040z First, the promoter generally charges a substantial fee. 1040z If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. 1040z You may also be subject to the penalty for failure to pay tax. 1040z These penalties are explained in the following paragraphs. 1040z Accuracy-related penalties. 1040z   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). 1040z Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. 1040z Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. 1040z   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. 1040z   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). 1040z Negligence or disregard of rules or regulations. 1040z   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. 1040z The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. 1040z    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. 1040z It also includes any failure to keep adequate books and records. 1040z A return position that has a reasonable basis is not negligence. 1040z   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. 1040z   The penalty for disregard of rules and regulations can be avoided if all the following are true. 1040z You keep adequate books and records. 1040z You have a reasonable basis for your position on the tax issue. 1040z You make an adequate disclosure of your position. 1040z Use Form 8275 to make your disclosure and attach it to your return. 1040z To disclose a position contrary to a regulation, use Form 8275-R. 1040z Use Form 8886 to disclose a reportable transaction (discussed earlier). 1040z Substantial understatement of tax. 1040z   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. 1040z An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. 1040z The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. 1040z   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. 1040z In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. 1040z Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. 1040z   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. 1040z An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. 1040z Substantial valuation misstatement. 1040z   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. 1040z The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. 1040z You underpaid your tax by more than $5,000 because of the misstatement. 1040z You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. 1040z   You may be assessed a penalty of 40% for a gross valuation misstatement. 1040z If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. 1040z The penalty rate is also 40% if the property's correct value or adjusted basis is zero. 1040z Transaction lacking economic substance. 1040z   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. 1040z For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. 1040z   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. 1040z   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. 1040z   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. 1040z Relevant facts include any facts affecting the tax treatment of the transaction. 1040z    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. 1040z Undisclosed foreign financial asset understatement. 1040z   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. 1040z An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. 1040z The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. 1040z Any foreign business you control, reportable on Form 5471, Information Return of U. 1040z S. 1040z Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. 1040z S. 1040z Persons With Respect to Certain Foreign Partnerships. 1040z Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. 1040z S. 1040z Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. 1040z Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. 1040z    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. 1040z See the Instructions for Form 8938 for details. 1040z    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. 1040z Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. 1040z Penalty for incorrect appraisals. 1040z   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. 1040z For details on the penalty amount and exceptions, see Publication 561. 1040z Penalty for failure to disclose a reportable transaction. 1040z   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). 1040z For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). 1040z This penalty is in addition to any other penalty that may be imposed. 1040z   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. 1040z For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. 1040z irs. 1040z gov/irb/2007-09_IRB/ar12. 1040z html. 1040z Accuracy-related penalty for a reportable transaction understatement. 1040z   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. 1040z This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. 1040z The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. 1040z You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. 1040z The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. 1040z   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. 1040z Civil fraud penalty. 1040z   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. 1040z Joint return. 1040z   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. 1040z Failure to pay tax. 1040z   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. 1040z Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. 1040z Prev  Up  Next   Home   More Online Publications