KPMG report: IRS limits penalty under economic substance statute

IRS limits penalty under economic substance statute

Guidance was issued by the IRS in 2014—Notice 2014-59—regarding the statutory economic substance doctrine and related penalties.

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What signals could Notice 2014-59 be sending about how the IRS plans to interpret the statutory definition of transaction and to apply the related strict liability penalty provision?

According to a KPMG report, the IRS's economic substance notice confirms:

  • The IRS will apply a facts-and-circumstances test in determining whether to look at the steps of a transaction as a whole instead of applying the rules to only the tax-motivated steps.
  • The IRS will not take an expansive view of the strict liability accuracy-related penalty for transactions that lack economic substance but are not disallowed by the IRS under the economic substance provision.

Read the March 2015 report [PDF 104 KB] prepared by KPMG LLP: What's News in Tax: IRS Limits Strict Penalty on Tax-Motivated Deals Not Challenged under Economic Substance Statute

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