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When Do You Disclose Losses to The IRS?
Disclosure of Loss Reportable Transactions
Congress has enacted a series of income tax laws designed to halt the growth of abusive tax avoidance transactions. These provisions include the disclosure of reportable transactions. Each taxpayer that has participated in a reportable transaction and that is required to file a tax return must disclose information for each reportable transaction in which the taxpayer participates. Use Form 8886 to disclose information for each reportable transaction in which participation has occurred.
Generally, Form 8886 must be attached to the tax return for each tax year in which participation in a reportable transaction has occurred. If a transaction is identified as a listed transaction or transaction of interest after the filing of a tax return (including amended returns), the transaction must be disclosed either within 90 days of the transaction being identified as a listed transaction or a transaction of interest or with the next filed return, depending on which version of the regulations is applicable. See the regulations under section 1.6011-4 for more information.
Material advisors with respect to any reportable transaction must also disclose information about the transaction on Form 8918. This requirement applies to material advisors who provide material aid, assistance, or advice on any reportable transaction after October 22, 2004.
One reportable transaction that must be disclosed is a loss transaction.
Losses that must be reported on Forms 8886 and 8918
If a taxpayer claims a loss under § 165 of at least one of the following amounts on a tax return, then the taxpayer has participated in a loss transaction and must file Form 8886. If an advisor provides material aid, assistance, or advice on a transaction that results in a taxpayer claiming a § 165 loss of at least one of the following amounts and meets other filing requirements; then the advisor is a material advisor and must file Form 8918.
For individuals, at least $2 million in a single tax year or $4 million in any combination of tax years.
For corporations (excluding S corporations), at least $10 million in any single tax year or $20 million in any combination of tax years.
For partnerships with only corporations (excluding S corporations) as partners (looking through any partners that are also partnerships), at least $10 million in any single tax year or $20 million in any combination of tax years, whether or not any losses flow through to one or more partners.
For all other partnerships and S corporations, at least $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more partners or shareholders.
For trusts, at least $2 million in any single tax year or $4 million in any combination of tax years, whether of not any losses flow through to one or more beneficiaries.
A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership.
Taxpayers whose filed return does not reflect a section 165 loss that equals or exceeds the applicable threshold amount have not participated in a loss transaction. If you are a partner, shareholder, or beneficiary of a pass-through entity, you have participated in a loss transaction if your tax return reflects a section 165 loss allocable to it from the pass-through entity that equals or exceeds the applicable threshold amount.
Losses that do not have to be reported on Forms 8886 and 8918:
Losses from casualties, thefts, and condemnations
Losses from Ponzi Schemes
Losses from the sale or exchange of an asset with a qualifying basis
Losses arising from any mark-to-market treatment of an item
Certain Swap losses (see Notice 2006-16 )
For additional information on losses that do not have to be reported on Form 8886, see Revenue Procedure 2004-66 and Revenue Ruling 2009-9.
IRS Tips for Deducting Casualty and Theft Losses
More From the IRS Summer Tax Tips 
Taxpayers who find themselves the victim of a natural disaster or theft this summer should know the rules for deducting their casualty losses next year when they file their federal tax return. Generally, you may deduct losses to your home, household items and vehicles on your federal income tax return.
Here are ten things the IRS wants you to know about deducting casualty or theft losses.
You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement. You must reduce your loss by the amount of the reimbursement.
A casualty does not include normal wear and tear or progressive deterioration from age or termite damage.
The damage must be caused by a sudden, unexpected or unusual event like a car accident, fire, earthquake, flood or vandalism.
If your property is not completely destroyed or if it is personal-use property, the amount of your casualty or theft loss is the lesser of the adjusted basis of your property, or the decrease in fair market value of your property as a result of the casualty or theft, reduced by any insurance or other reimbursement you receive or expect to receive.
If business or income-producing property, such as rental property, is completely destroyed, the amount of your loss is your adjusted basis in the property minus any salvage value, and minus any insurance or other reimbursement you receive or expect to receive.
To claim a casualty or theft loss, you must complete Form 4684, Casualties and Thefts, and attach it to your return. Generally, you may claim casualty or theft loss of personal use property only if you itemize deductions on Form 1040, Schedule A.
However, you can deduct a 2008 or 2009 net disaster loss from a federally-declared disaster even if you do not itemize your deductions.
If the property was held by you for personal use, you must further reduce your loss by $100. This $100 reduction for losses of personal-use property applies to each casualty or theft event that occurred during the year other than 2009. For 2009, individuals must reduce their casualty and theft losses for personal-use property by $500 instead of $100. This $500 reduction for losses of personal-use property applies to each casualty or theft event.
The total of all your casualty and theft losses of personal-use property usually must be further reduced by 10 percent of your adjusted gross income. The 10 percent AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009.
In figuring your loss, do not consider the loss of future profits or income due to the casualty.
Casualty losses are normally deductible only in the year the casualty occurred. But if you have a deductible loss from a federally declared disaster you can choose to deduct that loss on your tax return for the previous year. If you have already filed your return for the preceding year, you can claim the loss on the previous year tax return by filing an amended return.
For more information about casualty and theft losses and the special rules for net disaster losses see Publication 547, Casualties, Disasters and Thefts available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).
Links:
Tax Relief in Disaster Situations
Publication 547, Casualties, Disasters and Thefts
Form 4684, Casualties and Thefts
Stacie's Tax Stuff 