Wisconsin requires that taxpayers make certain disclosures of transactions the Internal Revenue Service (IRS) has designated as “reportable transactions” or “listed transactions.” These requirements apply retroactively to applicable transactions entered into on or after January 1, 2001, and transactions entered into before January 1, 2001 that reduced the taxpayer’s tax liability for taxable years beginning on or after January 1, 2001. See 2007 Wis. Act 20 § 2138 (creating Wis. Stat. § 71.81).
Taxpayers are eligible to receive a waiver of all penalties with respect to “tax avoidance transactions” if the taxpayer files an amended tax return reporting the total Wisconsin net income and tax for the applicable taxable year, computed without regard to any tax avoidance transaction and without regard to any other adjustment that is unrelated to any tax avoidance transaction, and timely pays the resulting additional tax and interest thereon. See 2007 Wis. Act 20 § 2137 (creating Wis. Stat. § 71.805).
New Disclosure Requirements
Wisconsin taxpayers must now disclose any federal "reportable transactions" with the Wisconsin Department of Revenue (Department) on a separate form.
The disclosure requirements are retroactive to transactions that affect tax liability in years beginning on or after January 1, 2001. Transactions are reportable if the transaction decreases the taxpayer’s federal income tax liability in a tax year beginning on or after January 1, 2001, regardless of when the taxpayer entered into the transaction. The taxpayer must file with the Department within 60 days of the required filing of the federal form. However, the taxpayer can disclose — by May 31, 2008 — transactions required to be reported to the IRS before October 28, 2007.
Penalties range up to $30,000 per undisclosed reportable transaction. Additional penalties apply when an undisclosed transaction results in a tax deficiency.
Certain advisors to reportable transactions under federal law must also disclose such transactions with the Department. Failure to do so can result in a $15,000 penalty for a reportable but not listed transaction to a $100,000 penalty for a listed transaction. Such advisors must also maintain a list of taxpayers who they have advised regarding a reportable transaction. Advisors may have earlier reporting deadlines than participants.
Tax Avoidance Transaction Voluntary Compliance Program (Tax Amnesty)
In conjunction with the new disclosure requirements, Wisconsin is also allowing a limited amnesty from penalties. New legislation allows taxpayers who have engaged in "tax avoidance transactions" to pay tax and interest while avoiding penalties that may be imposed later. Taxpayers must file under the program on or before May 31, 2008.
A "tax avoidance transaction" is generally any transaction entered into for the principal purpose of avoiding federal or Wisconsin income or franchise tax.
When the taxpayer pays the amount of Wisconsin income or franchise tax due to the tax avoidance transaction and the amount of interest due thereon (or the Department and the taxpayer enter into an installment agreement), the Department will waive all penalties applicable to the underreporting or underpayment of tax.
In order to participate, the taxpayer must complete and file (1) an amended Wisconsin tax return without including the tax avoidance transaction, (2) IRS Form 8886, Reportable Transaction Disclosure Statement, and (3) Form WI-VCP. A taxpayer who takes advantage of this program may generally not appeal or claim a credit for the tax avoidance transaction. For additional information, see Wisconsin Tax Bulletin 155, January 2008 and the Department’s Web site at http://www.revenue.wi.gov/ise/wtb/155tsp.pdf.
In all, the new provisions are limited and somewhat similar to other Wisconsin amnesty programs. Importantly, taxpayers under audit may still participate in this program. Whether to participate in this program depends upon the transaction in question and the surrounding facts and circumstances. Taxpayers will need to weigh all of the factors in determining whether to participate in the voluntary compliance program.
Carl D. Fortner
Jason J. Kohout
Isaac J. Morris
Timothy L. Voigtman
Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.