What Happens If Your ERTC Claim is Treated as a Listed Transaction? It's Complex.
By Jeffrey M. Glassman on January 24, 2024
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Jeffrey M. Glassman
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Yesterday, I wrote about some legislative proposals that could cause major changes to existing Employee Retention Tax Credit (“ERTC” or “ERC”) laws. A link to that article can be found here.
One of the provisions in the proposed legislation includes treating certain ERTC claims as “listed transactions.”
Also, at an extremely high and general level, a "COVID-ERTC document" is any document related to any ERTC claim, including any document related to eligibility determinations for, or the calculation or determination of any amount directly related to, an ERTC claim.
So, what happens if an ERTC claim meets these criteria and is treated as a listed transaction?
As a threshold matter, it is helpful to understand the meaning of the term “listed transaction.” A listed transaction means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the IRS as a tax avoidance transaction. Listed transactions must be reported to the IRS on a disclosure statement to be attached to a taxpayer’s return, i.e., Form 8886 “Reportable Transaction Disclosure Statement.” A copy of that disclosure statement must also be sent to the IRS’s Office of Tax Shelter Analysis (“OTSA”). If, however, the transaction is designated as a “listed transaction” after the tax return is filed, the taxpayer generally must file a disclosure statement with OTSA within 90 calendar days after the transaction became a listed transaction.
If a taxpayer fails to properly disclose a listed transaction, the Tax Code provides stiff penalties under Code Section 6707A, which are the greater of 75% of the decrease of the tax shown on the return as a result of the listed transaction or $200,000 ($100,000 in the case of a natural person). There are also minimum penalties of at least $10,000 ($5,000 for natural persons). Making matters worse, traditional penalty abatement procedures are largely unavailable for listed transaction penalties per the Tax Code.
The IRS may also have extra time to audit a listed transaction if a taxpayer fails to disclose the listed transaction properly. The Tax Code allows the IRS at least one year from the time it receives the required disclosure or information from a material advisor (more on this in a subsequent blog post). So, if a taxpayer fails to disclose, the statute of limitations (and thus the audit period) could remain open.
Taxpayers may also be subject to a different, and harsher, accuracy-related penalty regime specifically tailored for reportable and listed transactions. The penalty can apply even if there is no net understatement of tax so long as the reportable or listed transaction caused a reduction in the amount of tax due. The penalty can increase to 30% of the understatement rather than 20% for undisclosed listed transactions.
To summarize, if the proposed legislation becomes law, many taxpayers might just have 90 days to disclose their participation in a listed transaction or face severe penalties. There may also be other implications beyond civil penalties that taxpayers should consider. Arguably, filing a Form 8886 could be considered an admission to an improper and potentially illegal action. Before making such a filing, reputable tax counsel should be consulted. Each case will always need to be reviewed on its own facts and circumstances, but all taxpayers should be talking with counsel sooner rather than later if their ERTC claim may soon be considered a listed transaction. There may be actions that can be taken now—including potentially filing a “qualified amended return” (“QAR”)—to mitigate risk. But there could be downside risk with that strategy, if it even works (a QAR cannot be filed if the original reporting position was fraudulent and generally applies ony to income tax returns). A voluntary disclosure, either traditional or ERC-specific voluntary disclosure, or claim withdrawal may also be an option. While there may be actions that can be taken now to mitigate risk, like everything in federal tax procedure, determining the proper strategy is complex.
If you have any questions about this blog, the Employee Retention Tax Credit, or any criminal or civil tax matter, please contact me at 214-749-2417 or jglassman@meadowscollier.com
One of the provisions in the proposed legislation includes treating certain ERTC claims as “listed transactions.”
For purposes of sections 6111, 6112, 6707 and 6708 of the Internal Revenue Code of 1986:
(1) any COVID-related employee retention tax credit (whether or not the taxpayer claims such COVID-related employee retention tax credit) shall be treated as a listed transaction (and as a reportable transaction) with respect to any COVID–ERTC promoter if such promoter provides any aid, assistance, or advice with respect to any COVID–ERTC document relating to such COVID-related employee retention tax credit.
(1) any COVID-related employee retention tax credit (whether or not the taxpayer claims such COVID-related employee retention tax credit) shall be treated as a listed transaction (and as a reportable transaction) with respect to any COVID–ERTC promoter if such promoter provides any aid, assistance, or advice with respect to any COVID–ERTC document relating to such COVID-related employee retention tax credit.
The bill treats as listed transactions only those ERTC claims involving “COVID-ERTC promoter[s]” who aid, assist, or advise with respect to a “COVID-ERTC document.”
At an extremely high and general level, a “COVID-ERTC promoter” is (1) someone who assists with claiming the ERTC in exchange for a large fee based on the amount of the refund or credit; or (2) someone who derives a significant portion (the bill has specific thresholds) of their gross receipts from assistance with ERTC claims.Also, at an extremely high and general level, a "COVID-ERTC document" is any document related to any ERTC claim, including any document related to eligibility determinations for, or the calculation or determination of any amount directly related to, an ERTC claim.
So, what happens if an ERTC claim meets these criteria and is treated as a listed transaction?
As a threshold matter, it is helpful to understand the meaning of the term “listed transaction.” A listed transaction means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the IRS as a tax avoidance transaction. Listed transactions must be reported to the IRS on a disclosure statement to be attached to a taxpayer’s return, i.e., Form 8886 “Reportable Transaction Disclosure Statement.” A copy of that disclosure statement must also be sent to the IRS’s Office of Tax Shelter Analysis (“OTSA”). If, however, the transaction is designated as a “listed transaction” after the tax return is filed, the taxpayer generally must file a disclosure statement with OTSA within 90 calendar days after the transaction became a listed transaction.
If a taxpayer fails to properly disclose a listed transaction, the Tax Code provides stiff penalties under Code Section 6707A, which are the greater of 75% of the decrease of the tax shown on the return as a result of the listed transaction or $200,000 ($100,000 in the case of a natural person). There are also minimum penalties of at least $10,000 ($5,000 for natural persons). Making matters worse, traditional penalty abatement procedures are largely unavailable for listed transaction penalties per the Tax Code.
The IRS may also have extra time to audit a listed transaction if a taxpayer fails to disclose the listed transaction properly. The Tax Code allows the IRS at least one year from the time it receives the required disclosure or information from a material advisor (more on this in a subsequent blog post). So, if a taxpayer fails to disclose, the statute of limitations (and thus the audit period) could remain open.
Taxpayers may also be subject to a different, and harsher, accuracy-related penalty regime specifically tailored for reportable and listed transactions. The penalty can apply even if there is no net understatement of tax so long as the reportable or listed transaction caused a reduction in the amount of tax due. The penalty can increase to 30% of the understatement rather than 20% for undisclosed listed transactions.
To summarize, if the proposed legislation becomes law, many taxpayers might just have 90 days to disclose their participation in a listed transaction or face severe penalties. There may also be other implications beyond civil penalties that taxpayers should consider. Arguably, filing a Form 8886 could be considered an admission to an improper and potentially illegal action. Before making such a filing, reputable tax counsel should be consulted. Each case will always need to be reviewed on its own facts and circumstances, but all taxpayers should be talking with counsel sooner rather than later if their ERTC claim may soon be considered a listed transaction. There may be actions that can be taken now—including potentially filing a “qualified amended return” (“QAR”)—to mitigate risk. But there could be downside risk with that strategy, if it even works (a QAR cannot be filed if the original reporting position was fraudulent and generally applies ony to income tax returns). A voluntary disclosure, either traditional or ERC-specific voluntary disclosure, or claim withdrawal may also be an option. While there may be actions that can be taken now to mitigate risk, like everything in federal tax procedure, determining the proper strategy is complex.
If you have any questions about this blog, the Employee Retention Tax Credit, or any criminal or civil tax matter, please contact me at 214-749-2417 or jglassman@meadowscollier.com
