Senators Max Baucus and Charles Grassley, senior members of the Senate Finance Committee, have introduced tough new tax legislation known as the "Tax Shelter Transparency Act" that would impose penalties on promoters of tax shelters, mainly law and accounting firms.
Types of Tax Shelters
The legislation separates transactions into three types: reportable listed transactions, reportable avoidance transactions and a catch-all category for other transactions.
- Reportable listed transactions. The bill imposes a flat penalty of up to $200,000 on taxpayers who fail to report transactions identified as "tax avoidance transactions" by the Treasury Department. An incremental 30 percent accuracy-related penalty for underpayment of taxes could also be imposed. In addition, many of these taxpayers would have to report the penalties to the Securities and Exchange Commission, which would make the transgressions public and could affect the company’s stock price.
- Reportable avoidance transactions. Failure to disclose these transactions would result in a penalty of up to $100,000. Sen. Baucus explains these transactions include significant loss transactions, transactions with brief asset holding periods, transactions marketed under conditions of confidentiality, transactions subject to indemnification agreements, and transactions with a certain amount of book-tax difference.
Accounting firms that promote tax shelters would be liable for penalties of up to $10,000 per day if they fail to provide the IRS with a list of investors in tax avoidance schemes. The Treasury Department could also censure tax advisors or impose monetary penalties on tax advisors or firms that provide opinions "endorsing" tax-engineered arrangements and practice before the IRS.
"Following Enron's bankruptcy," said Sen. Baucus, "I think all Americans have a greater appreciation of the need for greater transparency in complex tax transactions. . . . The proliferation of tax shelters has been called ‘the most significant compliance problem confronting our system of self-assessment.’"
Download the technical explanation of the "Tax Shelter Transparency Act."