IRS Instruction 8725 – In the complex world of corporate finance and taxation, certain practices like greenmail can trigger specific IRS requirements. If you’re involved in stock transactions that might qualify as greenmail, understanding IRS Form 8725 and its instructions is crucial. This form is used to report and pay a 50% excise tax on gains or income from such transactions. In this SEO-optimized guide, we’ll break down everything you need to know about IRS Instruction 8725, including definitions, filing requirements, and step-by-step instructions, based on the latest IRS guidelines as of December 2025.
What Is Greenmail and Why Does It Incur an Excise Tax?
Greenmail refers to payments made by a corporation to a shareholder to repurchase its own stock at a premium, often to avert a hostile takeover. According to IRS definitions, greenmail occurs when a corporation (or someone acting on its behalf) pays an amount to directly or indirectly acquire its stock from a shareholder, under specific conditions:
- The shareholder held the stock for less than two years before entering the transfer agreement (determined under section 1223 of the Internal Revenue Code).
- During the two-year period ending on the acquisition date, the shareholder, related persons, or individuals acting in concert made or threatened a public tender offer for the corporation’s stock.
- The acquisition is not made on the same terms available to all shareholders.
A “public tender offer” is defined as any offer to purchase one or more stock interests in a corporation that must be filed or registered with federal or state agencies regulating securities. Related persons include those where losses would be disallowed under sections 267 or 707(b) of the Code. Indirect acquisitions count if the stock is sold to a related entity, such as a controlled subsidiary.
The excise tax on greenmail, imposed under section 5881, is a hefty 50% on the gain or other income realized from receiving greenmail. This tax aims to discourage such practices, which can be seen as manipulative in corporate governance. Greenmail is considered received when the gain or income is realized under your accounting method, regardless of whether it’s recognized for tax purposes.
Purpose of IRS Form 8725
Form 8725 serves a straightforward purpose: to report and pay the 50% excise tax on greenmail. You must file a separate form for each agreement involving the transfer of stock that qualifies as greenmail. This ensures accurate tracking and compliance with IRS rules. Note that the tax amount reported on this form cannot be deducted on your federal income tax return.
Who Must File Form 8725?
You are required to file Form 8725 if you are liable for the excise tax under section 5881. This typically applies to shareholders or entities receiving greenmail payments. If multiple agreements are involved, submit one form per agreement. Individuals, corporations, partnerships, and other entities may all need to file, depending on their role in the transaction.
When and Where to File?
Timing is critical to avoid penalties. File Form 8725 by the 90th day after you receive any portion of the greenmail. For extensions of time to file (but not to pay), use Form 7004 and submit it by the original due date.
Send the completed form to:
Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999
If amending a previous return, mark “Amended” at the top of the form and include all necessary corrections.
How to Complete IRS Form 8725: Step-by-Step Instructions?
Filling out Form 8725 requires careful attention to detail. Here’s a breakdown of the key lines based on the specific instructions:
Name, Address, and Identifying Number
Enter your name as it appears on your most recent federal income tax return. Include any suite or apartment numbers, or use a P.O. box if mail isn’t delivered to your street address. For the identifying number:
- Individuals: Use your Social Security Number (SSN).
- Nonresident or resident aliens without an SSN: Use your Individual Taxpayer Identification Number (ITIN).
- All others: Use your Employer Identification Number (EIN).
Tax Computation Section
- Line 1: Net Sales Price – Report the net proceeds from the sale of the stock subject to the tax.
- Line 2: Stock Details – For each acquisition:
- Column (a): Enter the date of acquisition (e.g., trade date for market-traded stocks). Apply holding period rules from section 1223 for exchanges, basis transfers, or wash sales under section 1091.
- Column (b): Enter the number of shares acquired.
- Column (c): Enter the cost or other basis (usually purchase price plus commissions). Adjust for inheritances, gifts, tax-free exchanges, wash sales, nontaxable distributions, or stock splits (refer to Pub. 551 for basis rules).
- Line 3: Subtotal – Calculate the total gain from the stock sales (Line 1 minus total from Line 2, Column (c)).
- Line 4: Other Income – Include any additional income subject to the excise tax.
- Line 5: Total Gain and Other Income – Sum Lines 3 and 4. This amount must be included as income on your federal tax return.
- Line 6: Tax – Multiply Line 5 by 50% (0.50) to compute the tax due.
- Line 7: Tax Paid With Form 7004 – Enter any payments made with an extension request.
- Line 8: Tax Due – Subtract Line 7 from Line 6. Pay this amount in full when filing. Use electronic methods like EFTPS (via IRS.gov/EFTPS) or same-day wire transfers for efficiency. Alternatively, mail a check payable to “United States Treasury” with your details and “Form 8725” noted.
- Line 9: Overpayment – If Line 7 exceeds Line 6:
- Line 9a: Enter the overpayment amount.
- For refunds, opt for direct deposit by providing your 9-digit routing number (Line 9b), account type (checking or savings, Line 9c), and account number (Line 9d). Refunds under $1 require a written request.
Round all money amounts to whole dollars by dropping cents under 50 and rounding up 50 cents or more. If more space is needed, attach separate sheets with your name and identifying number.
Signature and Paid Preparer
Sign the form following the rules for your federal income tax return. If using a paid preparer, they must sign, provide their Preparer Tax Identification Number (PTIN), and include their firm’s details.
Penalties for Non-Compliance
Failing to file or pay on time can result in significant penalties:
- Late Filing Penalty: 5% of the net amount due for each month or part of a month the return is late, up to 25%.
- Late Payment Penalty: 0.5% of the net amount due per month or part thereof, up to 25%.
- Interest: Charged on unpaid taxes from the due date at the rate under section 6621.
These penalties underscore the importance of timely compliance.
Recent Developments and Updates for 2026
As of the December 2025 revision, key updates include:
- Emphasis on electronic payments and refunds for those with access to U.S. banking systems.
- Addition of direct deposit fields on Lines 9b, 9c, and 9d.
- Recommendations for using IRS.gov/Payments for balances due.
Always check IRS.gov/Form8725 for the latest developments, especially post-publication legislation.
Additional Resources and Tips
For more details, download the official Form 8725 and instructions from the IRS website. Retain records as required under tax laws, and consider consulting a tax professional for complex transactions. The estimated time for Form 8725 preparation includes about 5 hours and 30 minutes for recordkeeping, 1 hour for learning, and 1 hour and 7 minutes for preparing and sending.
By staying informed about IRS Form 8725 and the excise tax on greenmail, you can ensure compliance and avoid costly penalties. If you suspect a transaction involves greenmail, act promptly to file and pay.