Combating Abusive Tax Shelters: A Summary

As part of a comprehensive strategy to ensure all taxpayers pay their fair share, the Treasury Department and the IRS continue to move aggressively to combat abusive tax avoidance transactions.

This multi-pronged strategy includes requiring prompt disclosure of potentially abusive transactions by taxpayers and promoters, providing more timely analyses of these transactions and publishing legal guidance as early as possible. It also involves auditing taxpayers and promoters to ensure that they have complied with their obligations under the tax rules.

In particular, the IRS conducts promoter examinations to determine whether a promoter has complied with regulations requiring identification of potentially abusive tax avoidance transactions by registering such transactions and maintaining and providing investor lists to the IRS upon request, and to determine whether the promoter may be liable for penalties for failure to comply with the registration and list maintenance requirements. Some promoters have cooperated by giving the IRS the information to which it is entitled; however, others have not.

Among the key steps taken as of mid-November 2003:

The IRS Large and Mid-Size Business Division (LMSB) is investigating 118 promoters (some of which are related) including law firms, investment banks and accounting firms. Sixty-nine of these promoters have provided some information on investors to the IRS.

Since the beginning of 2002, LMSB has issued 315 administrative summonses in 37 promoters cases (some of which are related) to examine promoters’ compliance with the registration and list maintenance requirements, by requesting information and investor lists.

Of these summonses, 114 involving 11 promoters have been referred to the Department of Justice for enforcement.

The Justice Department has filed summons enforcement actions against six promoters.

Since the beginning of 2002, LMSB has obtained court approval to serve John Doe summonses on 5 promoters.

With respect to promoters of other abusive transactions (including scams and schemes), the IRS Small Business/Self-Employed Division (SB/SE) currently has 659 promoter cases under investigation in the field and is following up on an additional 406 promoter leads. The SB/SE Lead Development Center is receiving an average of 105 promoter leads per month.

SB/SE has referred 93 promoter cases to the Justice Department. To date, the courts have ruled against 46 of these promoters — including 31 permanent injunctions — and 37 others are awaiting action by Justice or the courts.

In addition to these efforts to ensure that promoters comply with the law, IRS and Treasury have taken the following actions to fight abusive tax transactions:

The IRS and Treasury have identified 24 abusive transactions as "listed transactions" through formal guidance. Notice 2003-76 updated this listing. The participants in these listed transactions include foreign and domestic business entities, individual taxpayers and tax-exempt organizations.

The IRS is auditing taxpayers to determine whether they invested in abusive transactions, using information derived from promoter audits, a disclosure initiative (described below), public information and other sources.

LMSB conducted a disclosure initiative from December 2001 to April 2002 that resulted in 1,689 disclosures from 1,206 taxpayers. Taxpayers disclosed transactions in which they claimed deductions or losses amounting to billions of dollars. Agents continue to investigate the leads generated by information provided by the taxpayers who came forward.

IRS teams have been assembled to implement a comprehensive strategy to deal with questionable transactions. Teams are headed by IRS executives from the LMSB, SB/SE and/or Tax Exempt and Government Entities Divisions as appropriate, and include representatives from Chief Counsel, technical advisors and field specialists. The Chief Counsel has also created a new senior executive position within the Office of Chief Counsel to focus on potentially abusive tax avoidance transactions.

In October 2002, the IRS launched additional settlement initiatives involving three types of abusive transactions, to offer an equitable alternative to protracted enforcement and litigation. The last of these settlement initiatives ended in March 2003.

The President's 2004 budget proposes an additional $100 million to support this effort to pursue high-income individuals and businesses.

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