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IRS Changes Notice Requirement for Listed Transactions – Houston Tax Attorneys


When a taxpayer files a tax return reporting their income, the IRS gains insight into their earnings and can compare this information with similarly situated taxpayers. One might expect that this regular reporting would be sufficient for tax administration purposes. The IRS could simply identify and audit returns showing unusual drops in reported tax. This is true even in cases involving large gains offset by tax attributes that would be visible on the tax return.

However, the tax return process has become so cumbersome and complex that just filing a tax return alone is not enough. Taxpayers may have to file numerous different information reports, statements, etc. This includes information returns that are not treated as tax returns, but encompass a significant amount of information. The reportable information can include everything from foreign account balances, to amounts paid to contractors and employees, to bartering transactions.

This is also not enough. The tax reporting rules also require the reporting to highlight specific transactions that the IRS says that it is interested in. There are special rules and forms for this purpose–many of which are so nuanced that taxpayers often fail to file them or file them correctly. These transactions are referred to as “reportable transactions.” The reportable transaction reporting regime has recently faced legal challenges recently.

In the past few years

In the past few years, courts have ruled that the IRS’s process for designating these transactions that require additional information does not comply with administrative law requirements. In response, the IRS has now issued Action on Decision 2024-01, largely accepting these court decisions, even though it has largely rejected the outcome of these court cases for some time now.

Reportable Transactions vs. Listed Transactions

A reportable transaction is a type of tax transaction that the IRS requires taxpayers and their advisors to disclose. The rationale is that the transaction has characteristics that the IRS believes may indicate tax avoidance. Think of it as a transaction that raises certain red flags that the IRS wants to know about.

A listed transaction is a type of reportable transaction. It is more narrow. It is one that the IRS has explicitly identified as a tax avoidance scheme. The IRS has basically labeled these transactions as likely to be abusive and has formally “listed” them published guidance. When the IRS designates something as a listed transaction, it’s essentially saying “we’ve seen this specific scheme before, we consider it problematic, and we want to know if anyone is doing it.”

To give you a concrete example: If a company engages in a complex transaction that generates significant tax losses without corresponding economic losses, that might be a reportable transaction because it has characteristics that suggest potential tax avoidance. If that specific type of transaction matches one that the IRS has previously identified and published as problematic in their guidance, it would be a listed transaction.

Types of Reportable and Listed Transactions

To understand the difference, it is helpful to pause to describe the types of transactions that the IRS has designated as reportable transactions and listed transactions.

Reportable transactions the IRS has not designated as listed transactions are generally defined by their characteristics rather than their structure. They are broader rather than focused on targeted transactions.

Reportable transactions that aren’t listed generally fall into five distinct categories:

  1. Confidential transactions involve tax advice given under secrecy conditions with restricted disclosure rights.
  2. Transactions with contractual protection have fees contingent on achieving tax benefits or include refund rights if the tax treatment fails.
  3. Loss transactions generate significant tax losses above specified thresholds (these amounts vary by taxpayer type, e.g., $10 million for corporations and $2 million for individuals in a single year).
  4. Transactions of interest occupy a middle ground between regular reportable transactions and listed transactions. These are transactions that the IRS has identified as potentially abusive and is actively investigating, but hasn’t yet made a final determination. Think of it as a watchlist – these transactions might eventually become listed transactions, or the IRS might determine they’re acceptable after further study.

Compare this to the listed transactions that the IRS has designated. These transactions involve particular tax transactions. They are more specific. The transactions that the IRS has identified as listed transactions generally are:

  • Are multi-step and highly engineered
  • Often involve multiple entity types (corporations, partnerships, trusts)
  • Frequently use pass-through entities as key components
  • Usually aim to create artificial losses, shift income, or accelerate deductions
  • Often involve timing mismatches or basis manipulation
  • Frequently cross between corporate and individual taxation

The conservation easement noted in this Action on Decisio…

The conservation easement noted in this Action on Decision is an example. A syndicated conservation easement is listed because it takes a legitimate conservation tax benefit and runts it through a partnership structure where investors buy into land at market price, obtain inflated appraisals far above the purchase price, place conservation restrictions on the property, and claim charitable deductions typically worth 4-5x their investment.

The capital outlay is much smaller than the tax benefit that is derived. This is accomplished by rapid value inflation, year-end timing, and marketing focused on multiplying tax deductions. One can see why the IRS would be interested in this transaction and want to know who is engaging in these transactions, as the tax benefit is high and the IRS needs to examine them to determine which ones are legitimate and which ones are not.

Material Advisors & Their Obligations

The reporting rules don’t just affect taxpayers. They also apply to so-called “material advisors.” Material advisors are professionals who provide assistance with the reportable transactions.

Material advisors must report all categories of reportable transactions, including listed transactions and transactions of interest. Who qualifies as a material advisor depends on fee thresholds and type of client, but not on transaction type. The threshold is $50,000 in fees for transactions where all advisees are individuals, and $250,000 for transactions involving any other type of advisee (like corporations or partnerships). A tax professional who exceeds these thresholds becomes a material advisor and must comply with the reporting requirements.

Material advisors have to file their own disclosure forms (Form 8918) and maintain lists of advisees who participated in these transactions. These requirements are in addition to any reporting the taxpayer has to do. If the IRS requests these lists, the material advisor must provide them within 20 business days.

This means that both the taxpayer and their advisors must independently report the same transaction. The IRS can then cross-reference these filings to identify unreported transactions. The dual reporting system helps explain why the penalties discussed below are imposed on both taxpayers and material advisors.

Why Does It Matter?

The consequences of failing to disclose reportable transactions can be severe. The IRS has a number of penalties and sanctions that it can apply when it comes to these transactions.

For reportable transactions that are not listed transactions, the penalty is $50,000 per failure to disclose. So-called “material advisors” could also get a $50,000 penalty. This is a per year and per transaction penalty.

For listed transactions, the penalty jumps to $200,000 per failure to disclose. So four times higher than a reportable transaction. Material advisors could also get a penalty equal to $200,000 or 50% of the gross income they received from the transaction advice. This is separate from the IRS’s ability to ask a court to order that the advisor pay over 100% of the fees they earned from the transaction.

Suffice it to say that there is also a greater likelihood of criminal investigation and prosecution in cases involving listed transactions.

There is also a statute of limitations issue. Absent fraud or an unfilled tax return, the rules enacted by Congress generally do not give the IRS unlimited time to evaluate transactions. The IRS only has so long to look for and at issues. With listed transactions, the statute of limitations may be suspended until proper disclosure is made.

How Does the IRS List a Transaction?

The IRS designates a transaction as “listed” through a formal process of issuing published guidance. This typically happens in one of these ways:

  1. Through a Notice: The IRS issues a formal Notice describing the transaction and declaring it as listed. For example, IRS Notice 2017-10 listed certain syndicated conservation easement transactions.
  2. Through Revenue Rulings: The IRS can issue a Revenue Ruling that identifies and describes a transaction as listed.
  3. Through Regulations: The IRS may incorporate listed transactions into Treasury Regulations.

The process typically involves:

  • The IRS identifying a pattern of transactions they believe are being used for tax avoidance
  • Internal analysis and review of the transaction structure
  • Development of detailed technical description of the transaction
  • Publication of the formal guidance that:
  • Describes the transaction in detail
  • Explains why it’s considered abusive
  • Specifies which variations of the transaction are covered
  • States when the listing is effective
  • Outlines disclosure requirements

Once published, all taxpayers and material advisors are on notice that the transaction is listed and must be disclosed if they engage in it or substantially similar transactions.

The IRS even maintains a list of listed transactions on its website.

This brings us to the current Action on Decision and the court cases that the IRS has adamantly contested and now says that it will follow. The question is whether the IRS’s listing process has complied with the Administrative Procedure Act (“APA”).

The APA establishes requirements federal agencies, including the IRS, have to follow to conduct rulemaking. Under the APA, agencies must generally provide notice of proposed rules and give the public an opportunity to comment before rules become final. This “notice-and-comment” process is fundamental to administrative law. It ensures transparency and public participation in agency rulemaking. This is important to our system of justice as administrative agencies are not staffed by individuals elected by the public–they are often career civil servants who may have agendas or views that differ from the law and from what most Americans would expect.

This guidance is in response to Green Rock LLC v. Commissioner, 104 F.4th 220 (11th Cir. 2024), but it addresses several other court cases that preceded Green Rock that held that the IRS’s notice process did not comply with the APA. The first is Mann Construction v. United States, in which the Sixth Circuit considered the IRS’s designation of transactions as “listed” via Notices that did not follow any APA notice-and-comment procedures.

The court held that IRS Notices identifying listed transa…

The court held that IRS Notices identifying listed transactions are legislative rules subject to the APA’s notice-and-comment requirements and that they are not interpretive rules exempt from these procedures. The court basis was that these Notices create new legal obligations (disclosure requirements) and impose significant penalties for non-compliance, hallmarks of legislative rules. This makes it a legislative rule.

Following Mann and similar decisions in other courts

Following Mann and similar decisions in other courts, such as the Green Rock case, the IRS has now acknowledged in this Action on Decision that it will treat its listed transaction designations as subject to APA notice-and-comment requirements. This is a significant shift in how the IRS will designate listed transactions going forward. Rather than immediately implementing listed transaction designations through Notices posted on the IRS.gov website, the IRS will need to first propose the designation, allow for public comment, and then issue a final rule.

For those who failed to report a transaction and were assessed penalties, it may be time to revisit the penalties. This includes cases where the statute of limitations was extended for failing to file the disclosure forms. As noted in the IRS guidance, taxpayers may be able to avoid penalties for these already existing cases.

The Takeaway

The IRS’s acceptance of notice-and-comment requirements for listed transaction designations is a significant shift in tax administration. The notice-and-comment process could benefit both the IRS and taxpayers by fostering dialogue with stakeholders, potentially resulting in more precise and effective guidance that better targets truly abusive transactions. This collaborative approach may help the IRS focus its limited resources on the most concerning transactions while providing clearer boundaries for legitimate tax planning. Those who have been assessed these penalties or who have pending penalties may also benefit by being able to avoid the penalties altogether given this guidance.

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FBAR Penalties Are Unconstitutionally Excessive – Houston Tax Attorneys


Most tax penalties follow a simple logic. The bigger the tax problem, the bigger the penalty.

For example, the civil fraud penalty is one of the most severe penalties in our tax code. This makes sense as fraud is the most severe thing that one can do wrong when it comes to taxes. The civil fraud penalty is 75% of the understated tax. This means it is effectively capped at about 26% of the underlying income (75% of the 35% maximum tax rate).

There are other penalties that are not tied to the tax loss to the government. Foreign Bank and Financial Accounts Report (“FBAR”) penalties are a prime example. FBAR penalties are based solely on unreported account balances. FBAR penalties can exceed 100% of the account value. This makes the FBAR penalties significantly larger than even the harshest traditional tax penalties. They can even greatly exceed the amount for the civil fraud penalty.

FBAR penalties often are excessive. Taxpayers have argued FBAR penalties are excessive. The courts have generally dismissed these challenges, however. This has recently changed with the United States v. Schwarzbaum, No. 22-14058 (11th Cir. Jan. 23, 2025) case.

Facts & Procedural History

The case involves a taxpayer who was born in Germany. He became a legal permanent resident of the U.S. in 1995 and obtained his U.S. citizenship in 2000. He then split his time between Costa Rica, Switzerland, and the United States.

The taxpayer’s wealth originated from his father’s successful textile and real estate ventures in Germany. In 2001, the father transferred an existing Swiss bank account to the taxpayer and continued making substantial gifts to the account through 2009. The funds were managed according to the father’s instructions by bankers, with the taxpayer never directing investments.

Between 2006 and 2009, the taxpayer maintained interests in 13 foreign accounts. This included 11 accounts in Switzerland and two in Costa Rica. The account balances were substantial:

  • One UBS account held over $8.6 million
  • Another UBS account contained more than $15 million
  • Multiple other Swiss accounts held between $2.6 million and $4.5 million each
  • One account (Aargauische) maintained a balance under $16,000

The taxpayer properly disclosed these accounts to his CPAs. However, the taxpayer’s CPAs incorrectly advised him that he had no duty to report these assets. Relying on this incorrect advice, the taxpayer filed incomplete FBARs. In 2007 he reported only one Scotiabank account. He filed no FBAR for 2008 until 2011. In 2009, he filed to disclose just three accounts out of the many he held.

In 2010, the taxpayer entered the IRS’s Offshore Voluntary Disclosure Initiative (“OVDI”). As part of this, the taxpayer disclosed 17 Swiss accounts and 4 Costa Rican accounts. The taxpayer later opted out of the program, which triggered an IRS audit.

The procedural history that followed was complex. The IRS initially calculated FBAR penalties at $35.4 million. This was reduced to $13.7 million after mitigation. The penalties were timely assessed in September 2016 under a tolling agreement.

In August 2018, the U.S. filed suit to collect the penalties. In March 2020, the district court found willful violations for 2007-2009. Multiple appeals followed regarding calculation methods. The IRS ultimately recalculated the penalties at $13.5 million. The government sought a final judgment of $12.5 million.

After an initial decision focusing on procedural issues, the Eleventh Circuit Court of Appeals granted a petition for rehearing, vacated its prior opinion, and addressed the constitutional question of whether FBAR penalties are so severe that they violate the Eighth Amendment’s prohibition on excessive fines.

About FBAR Penalties

U.S. citizens and residents have to file an FBAR to report financial interest in or signature authority over most foreign financial accounts.

The forms have to be filed if the accounts exceed $10,000 in total at any time during the calendar year. This is not an annual account balance test. If the combined accounts exceed $10,000 even for one day, the filing requirement is triggered.

The FBAR forms are not filed with the IRS. They are filed with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) through its BSA E-Filing System.

Unlike most tax penalties, FBAR penalties are not found in the tax code. They come from the Bank Secrecy Act of 1970, which was primarily designed to combat money laundering and other financial crimes. The IRS enforces these penalties even though they were not found in the tax law and not filed with the IRS.

Congress has created different tiers of penalties for FBAR violations. Non-willful violations are capped at $10,000 per violation. The courts have determined this is per account, not per year.

Willful violations trigger much steeper penalties. The IRS can assess the greater of $100,000, or 50% of the account balance at the time of the violation. This is the conjunctive “or” and not capped at $100,000.

The standard for “willful” violations in FBAR cases is surprisingly low. While criminal tax cases require proof that a taxpayer intentionally violated a known legal duty, civil FBAR cases only require recklessness. The courts have held that simply checking “no” on Schedule B of a tax return (which asks about foreign accounts) can be evidence of willfulness if the taxpayer has significant foreign accounts. Even failing to review tax returns carefully before signing them can constitute reckless conduct that triggers the larger willful FBAR penalties.

For willful violations, the penalties can stack year after year. Since the penalty is based on the account balance on the FBAR due date in each year, an account could theoretically be wiped out in just two years of penalties.

The Constitutional Framework

The Constitution gives Congress broad powers when it comes to taxes. Article I, Section 8 grants Congress the power to “lay and collect taxes.” The Sixteenth Amendment explicitly authorizes income taxes. Constitutional challenges to tax laws often focus on whether Congress acted within these enumerated powers, whether taxes are uniformly applied, or whether taxpayers received proper notice and hearings, or the taxpayer’s right to choose their own tax attorney.

FBAR penalties present a different constitutional question. Since these penalties originated in banking law rather than tax law, they raise issues under the Eighth Amendment’s Excessive Fines Clause. This clause states that “excessive fines shall not be imposed.”

While the Excessive Fines Clause originally targeted criminal penalties, the Supreme Court has extended it to civil penalties that serve punitive purposes. The key question is whether a penalty is solely remedial or serves even partly as punishment. If the penalty has any punitive aspect, it must not be “excessive” under the Eighth Amendment.

This creates an unusual situation. Congress has nearly unlimited power to impose taxes and traditional tax penalties. But when Congress creates penalties outside the tax code–like FBAR penalties–those penalties face constitutional scrutiny under the Excessive Fines Clause.

The Court’s Constitutional Analysis

The Eleventh Circuit had to first consider how FBAR penalties compare to traditional tax penalties. Most tax penalties are limited by being tied to the tax loss. The civil fraud penalty–one of the most severe penalties–is 75% of the understated tax. With our maximum tax rate of 35%, this means the civil fraud penalty cannot exceed 26% of the underlying income. FBAR penalties, by contrast, can exceed the entire value of the account.

With this context, the court found that FBAR penalties are subject to Eighth Amendment review because they serve punitive, not merely remedial, purposes. The court pointed to several factors for this:

  1. The penalties are calculated without regard to government costs
  2. The penalty structure focuses on culpability (higher for willful violations)
  3. Congress explicitly designed the penalties for deterrence
  4. The penalties can far exceed typical tax penalties

Applying this framework, the court found that $100,000 penalties on accounts holding less than $16,000 were “grossly disproportional” and thus unconstitutional. However, the court upheld larger penalties for the foreign accounts that held millions of dollars. This decision is particularly important as there are no administrative collection due process rights for FBAR penalties.

The court’s analysis raises fundamental questions about penalty proportionality. Most tax penalties are tied to the tax loss to the government. They are capped based on the tax rate. For example, the civil fraud penalty is 75% of the understated tax. With a maximum tax rate of 35%, this means the penalty cannot exceed 26% of the underlying income (75% x 35%).

As noted above, FBAR penalties work differently. They are based on account balances, not tax loss. They can exceed 100% of the account value. This leads to situations where the penalty amount may be thousands of times larger than any potential tax loss. The court acknowledged this disparity but concluded that hiding foreign accounts creates unique harms that justify larger penalties–at least for substantial accounts.

Differing Opinions for Now

This case marks a significant shift in how courts view FBAR penalties. In United States v. Toth, 33 F.4th 1 (1st Cir. 2022), the First Circuit had previously held that FBAR penalties entirely escape Eighth Amendment scrutiny. That court viewed these penalties as purely remedial, merely compensating the government for the costs of investigating foreign accounts.

The Eleventh Circuit explicitly rejected this view. It found that even if FBAR penalties serve some remedial purpose, they are at least partly punitive and thus subject to constitutional review. This creates a direct split between circuits on a fundamental question: whether there are any constitutional limits on FBAR penalties. Given the stakes involved and the frequency of FBAR cases, the Supreme Court may need to resolve this issue.

The Takeaway

This case preserved the IRS’s ability to impose significant FBAR penalties on larger foreign accounts. However, the case provides some grounds for taxpayers to make this type of constitutional argument when trying to defend against FBAR penalties. It suggests that penalties grossly disproportionate to account balances–like a $100,000 penalty on a $16,000 account–may be successfully challenged as unconstitutional.

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