IRS Federal Register Update: Excise Tax Returns & Conversion Transaction Netting

Administrative Upkeep: IRS Seeks Comments on Existing Tax Collections

The IRS is soliciting public input on two existing information collections as part of its administrative duties under the Paperwork Reduction Act. The collections relate to:

• Excise taxes for employee benefit plans.
• Netting rules applicable to conversion transactions under Section 1258.

Interested parties have until March 13, 2026, to submit their comments.

Employee Benefit Plans: The Burden of Excise Tax Compliance

The IRS is also seeking to extend its information collection regarding excise taxes related to employee benefit plans. These taxes arise from failures to comply with various provisions within the Internal Revenue Code.

Specifically, the collections involve Form 5330, "Return of Excise Taxes Related to Employee Benefit Plans," and Form 8868, used to request extensions for filing these returns.

• Form 5330 is used to report and pay excise taxes imposed under several sections of the Internal Revenue Code, including:
  • Section 4971, which addresses failures to meet minimum funding standards for pension plans.
  • Section 4972, concerning nondeductible contributions to qualified retirement plans.
  • Section 4975, which imposes taxes on prohibited transactions between a plan and disqualified persons.
  • Section 4976, 4977, 4978, 4978A, 4978B, 4979, 4979A, and 4980, which cover a range of other excise tax situations, such as excess contributions and employer reversions from qualified plans.
• Form 8868 is used to request an extension of time to file Form 5330 or other exempt organization returns related to employee benefit plans.

The IRS estimates that approximately 26,460 respondents will be affected by this collection, with an estimated total annual burden of 1,255,149 hours (approximately 47 hours and 26 minutes per respondent). It is important to note that this notice concerns an extension of a currently approved collection, and there are no proposed changes to the forms themselves.

Conversion Transactions: Netting Rules and Capital Gains

The previous notice discussed Form 8868, which is used to request an extension of time to file Form 5330 or other exempt organization returns related to employee benefit plans.

The IRS is also seeking comments regarding TD 8649, concerning the netting rule for certain conversion transactions. This notice relates to record-keeping requirements under Section 1258 of the Internal Revenue Code (IRC). Section 1258 addresses situations where taxpayers attempt to recharacterize what is effectively ordinary income as capital gains, often through transactions designed to extract the time value of money.

• Technical Context: Section 1258 prevents taxpayers from disguising ordinary income as capital gains.
• The Regulation: Treasury Regulations section 1.1258–1 provides that certain gains and losses may be netted for purposes of determining the amount of gain recharacterized.
• The 'Collection': The specific information collection at issue is the requirement for taxpayers to identify positions on their books and records as part of a conversion transaction before the close of the day the positions become part of the transaction. This identification is a prerequisite for eligibility for the netting relief provided in the regulations.

The IRS estimates that approximately 50,000 respondents are affected by this collection, with an estimated time of 6 minutes per respondent. The estimated total annual burden hours is 5,000. Although the time burden is low, the record-keeping requirement is essential for taxpayers seeking to utilize the netting rules under Section 1258.

Deadlines and Submission Details

The IRS is soliciting public input on the information collection requests discussed above, as mandated by the Paperwork Reduction Act of 1995. This act requires federal agencies to seek public comment on proposed and existing information collection activities.

Interested parties are encouraged to submit written comments on or before March 13, 2026, to ensure consideration. Comments should be directed to:

• Andres Garcia, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224.

Alternatively, comments may be submitted via email to pra.comments@irs.gov. Please include the relevant OMB Control Number in the subject line:

• For comments related to excise taxes on employee benefit plans (Forms 5330 and 8868), include “OMB Number: 1545–0575”.
• For comments regarding the netting rule for certain conversion transactions under Section 1258, include "OMB Control No. 1545–1452". Section 1258, which addresses the recharacterization of capital gains, aims to prevent taxpayers from converting ordinary income into capital gains through specific transactions.

For further information or to request copies of the information collection requests, contact LaNita Van Dyke at (202) 317–6009, or via email at Lanita.vandyke@irs.gov.