Title: IRS Alters Stance on Listed Transaction Penalties in Recent Guidance
The Internal Revenue Service (IRS) keeps a close eye on questionable tax activities, particularly those deemed abusive. If a certain transaction becomes widespread, the IRS labels it as a "listed transaction," necessitating self-reporting by taxpayers and advisors through Form 8886 and Form 8918, respectively. Not meeting these filing requirements could lead to hefty civil fines and criminal penalties.
However, the IRS has encountered setbacks in enforcing listed-transaction penalties due to legal challenges. Courts have sided with taxpayers, arguing that the penalties are unlawful because the corresponding notices didn't adhere to the Administrative Procedure Act's (APA) notice-and-comment procedures. As a consequence, the IRS issued an "Action on Decision" (AOD) in 2025, providing concessions to those involved in listed transactions.
A listed transaction is a reportable transaction that mirrors or greatly resembles one specifically identified by the IRS as a tax avoidance tactic. Currently, there are 34 listed transactions, which can be found here. Under the American Jobs Creation Act of 2004, taxpayers can face penalties for failing to timely submit Form 8886 or face enhanced accuracy penalties related to listed transaction reporting positions. Additionally, the IRS has an extended deadline for assessing additional income taxes and penalties if a taxpayer fails to file Form 8886.
The APA requires federal organizations, such as the IRS, to follow specific rules-making procedures to issue certain types of regulations. Generally, if the agency aims to publish a legislative rule, it must follow the APA's notice-and-comment requirements. Without complying with these requirements, federal courts are authorized to invalidate legislative rules.
Recently, taxpayers have challenged listed-transaction notices, arguing that they are legislative rules that should have gone through the APA's notice-and-comment process. Rulings from the Sixth and Eleventh Circuits have supported taxpayers' claims, dismissing the listed-transaction penalties.
The AOD, released in 2025, acknowledges these court decisions and confirms that the IRS will refrain from imposing listed-transaction penalties and related penalties in certain scenarios. Notably, this relief does not apply in situations with court-approved settlements, existing final court decisions, or expired statutes of limitations.
Taxpayers involved in listed transactions should review the AOD to assess their eligibility for relief and concessions. Those who have already paid listed-transaction penalties should consult their tax professionals to explore potential refund claims.
Green Valley Investors, having engaged in a listed transaction, might have avoided hefty civil fines and criminal penalties due to the IRS's concessions outlined in the 2025 AOD. However, if Mann Construction entered into a similar transaction, they could still face penalties if there are court-approved settlements, existing final court decisions, or expired statutes of limitations. The APA Tax Court rulings, which have dismissed listed-transaction penalties in some cases, may provide a basis for Green Rock LLC to seek a refund if they had already paid such penalties.
