IRS Provides Penalty Relief to Some Participants in Micro-Captive Transactions

(Parker Tax Publishing April 2025)

The IRS provided relief from penalties under Code Sec. 6707A(a) to participants in micro-captive reportable transactions that fail to file certain disclosure statements required by April 14, 2025, if such participants file the required disclosure statement by July 31, 2025. The IRS also provided relief from penalties under Code Sec. 6707(a) for material advisors to certain micro-captive reportable transactions that are required to file a disclosure statement by April 30, 2025, if such material advisors file the disclosure statement by July 31, 2025. Notice 2025-24.

Background

On January 14, 2025, the IRS published final regulations under Code Sec. 6011 (Reg. Sec. 1.6011-10 and Reg. Sec. 1.6011-11) in T.D. 10029. Reg. Sec. 1.6011-10(a) identifies transactions that are the same as, or substantially similar to, certain micro-captive transactions as listed transactions, a type of reportable transaction (Micro-captive Listed Transaction). Reg. Sec. 1.6011-11(a) identifies transactions that are the same as, or substantially similar to, certain other micro-captive transactions as transactions of interest, another type of reportable transaction (Micro-captive Transaction of Interest). Material advisors and certain participants in these reportable transactions are required to file disclosure statements with the IRS and the Office of Tax Shelter Analysis (OTSA) and are subject to penalties if they fail to timely make such disclosures. In describing the disclosure obligations for participants and material advisors, respectively, Reg. Sec. 1.6011-10 and Reg. Sec. 1.6011-11 reference the provisions of Reg. Sec. 1.6011- 4(e), for participants, and Reg. Sec. 301.6111-3, for material advisors.

Generally, Reg. Sec. 1.6011-4(e)(1) provides that the disclosure statement for a reportable transaction must be attached to the taxpayer's tax return for each tax year for which a taxpayer participates in a reportable transaction. In addition, a disclosure statement for a reportable transaction must be attached to each amended return that reflects a taxpayer's participation in a reportable transaction. A copy of the disclosure statement must be sent to OTSA at the same time that any disclosure statement is first filed by the taxpayer pertaining to a particular reportable transaction. In addition, Reg. Sec. 1.6011-4(e)(2)(i) provides that if a transaction becomes a listed transaction or a transaction of interest after the filing of a taxpayer's tax return (including an amended return) reflecting the taxpayer's participation in the transaction and before the end of the period of limitations for assessment of tax for any tax year in which the taxpayer participated in the transaction, then a disclosure statement must be filed, regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or a transaction of interest, with OTSA within 90 calendar days after the date on which the transaction became a listed transaction or a transaction of interest (Participant Later Identified Transaction rule). Participants required to disclose these transactions who fail to do so may be subject to a penalty under Code Sec. 6707A(a).

Reg. Sec. 301.6111-3(e) provides that a material advisor's disclosure statement fora reportable transaction must be filed with OTSA by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to the reportable transaction or in which the circumstances necessitating an amended disclosure statement occur. Reg. Sec. 301.6111-3(b)(4)(iii) provides that if a transaction that was not a reportable transaction is identified as a listed transaction or a transaction of interest in published guidance after the occurrence of the events described in Reg. Sec. 301.6111-3(b)(4)(i), the person will be treated as becoming a material advisor on the date the transaction is identified as a listed transaction or a transaction of interest (Material Advisor Later Identified Transaction rule). Material advisors required to disclose these transactions pursuant to Code Sec. 6111 and Reg. Sec. 301.6111-3 who fail to do so may be subject to a penalty under Code Sec. 6707(a).

Reg. Sec. 1.6011-10(a) and Reg. Sec. 1.6011-11(a) identified certain micro-captive transactions as Micro-captive Listed Transactions or Micro-captive Transactions of Interest effective as of January 14, 2025. Consequently, as described in Reg. Sec. 1.6011-10(h)(2) and Reg. Sec. 1.6011-11(h)(2), participants in transactions identified in Reg. Sec. 1.6011-10(a) and 1.6011-11(a) who filed returns reflecting their participation in such transactions and for which the period of limitations for assessment of tax had not ended on or before January 14, 2025, generally must file initial disclosure statements with OTSA by April 14, 2025, as required by the Participant Later Identified Transaction rule. The Participant Later Identified Transaction rule may not apply for taxpayers who have finalized a settlement agreement, as set forth in Reg. Sec. 1.6011-10(h)(2) and Reg. Sec. 1.6011-11(h)(2). Further, the Participant Later Identified Transaction rule may not apply for participants in Micro-captive Transactions of Interest that filed disclosure statements pursuant to Notice 2016-66, as set forth in Reg. Sec. 1.6011-11(h)(2). As described in Reg. Sec. 1.6011-10(h)(3) and Reg. Sec. 1.6011-11(h)(3), material advisors to transactions identified in Reg. Sec. 1.6011-10(a) and Reg. Sec. 1.6011-11(a) who made a tax statement on or after January 14, 2019, must file the required disclosure with OTSA by April 30, 2025, as required by the Material Advisor Later Identified Transaction rule. Transactions for which the Participant Later Identified Transaction rule or Material Advisor Later Identified Transaction rule apply are referred to as "Later Identified Micro-captive Listed Transactions" and "Later Identified Micro-captive Transactions of Interest."

According to the IRS, stakeholders have raised concerns regarding the ability of micro-captive reportable transaction participants to timely comply with their initial filing obligations with respect to Later Identified Micro-captive Listed Transactions and Later Identified Micro-captive Transactions of Interest. In response, on April 11 the IRS issued Notice 2025-24 to provide a limited waiver of penalties under Code Sec. 6707A(a) and Code Sec. 6707(a).

Notice 2025-24

In light of potential challenges associated with preparing disclosure statements during tax return filing season and in the interest of sound tax administration, the IRS will waive penalties under Code Sec. 6707A(a) with respect to Later Identified Micro-captive Listed Transaction and Later Identified Micro-captive Transaction of Interest disclosure statements completed in accordance with Reg. Sec. 1.6011-4(d) and the Instructions to Form 8886, Reportable Transaction Disclosure Statement, if the participant files the required disclosure statement with OTSA by July 31, 2025.

This relief is limited to Later Identified Micro-captive Listed Transactions and Later Identified Micro-captive Transactions of Interest. Notice 2025-24 does not provide relief from penalties under Code Sec. 6707A(a) for participants required to file a copy of their disclosure statements with OTSA at the same time the participant first files a disclosure statement by attaching it to the participant's tax return pursuant to Reg. Sec. 1.6011- 4(e)(1). The IRS stated that taxpayers concerned about meeting the due date for such disclosure statements can request an extension of the due date for their tax return to obtain additional time to file such disclosure statements. Disclosures required from participants with respect to Micro-captive Listed Transactions and Micro-captive Transactions of Interest on or after July 31, 2025, remain due as otherwise set forth in Reg. Sec. 1.6011-4(e).

The IRS will also waive penalties under Code Sec. 6707(a) with respect to Later Identified Micro-captive Listed Transaction and Later Identified Micro-captive Transaction of Interest disclosure statements completed in accordance with Reg. Sec. 301.6111-3(d) and the instructions to Form 8918, Material Advisor Disclosure Statement, if the material advisor files the required disclosure statement with OTSA by July 31, 2025. Disclosures required from material advisors with respect to Micro-captive Listed Transactions and Micro-captive Transactions of Interest on or after July 31, 2025, remain due as otherwise set forth in Reg. Sec. 301.6111-3(e). Notice 2025-24 does not modify any list maintenance and furnishment obligations of material advisors as set forth in Code Sec. 6112 and Reg. Sec. 301.6112-1.

For a discussion of micro-captive insurance arrangements, see Parker Tax ¶92,730. For a discussion of return disclosure requirements for reportable transactions, see Parker Tax ¶250,140.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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