IRS Cracks Down on Three Tax Shelters

The Internal Revenue Service has announced that participants in three highly-complex tax shelters have a limited time span in which to settle up with the government and avoid the cost of litigation.

The three targeted shelters are tax avoidance devices frequently offered by promoters who gain fees for selling interests in the shelters. No specific connection was made in the IRS new release to current investigations of tax shelters offered for sale by large accounting firms including Andersen, Ernst & Young, KPMG, and BDO Seidman.

The IRS is offering a small window of opportunity for shelter participants to come forward and make a settlement. The settlement terms differ slightly with each of the three shelters.

Section 302/318 basis shifting includes shelters that provide an opportunity for taxpayers to inflate the initial cost of stock, then use the increase in basis to claim a larger loss if the stock is sold at a loss or a smaller gain if the stock is sold at a profit. Taxpayers participating in shelters of this type will receive notices from the IRS that they have until December 3, 2002 to settle any outstanding taxes, interest, and penalties while avoiding the cost of litigation. IRS Announcement 2002-97 addresses the specifics of this settlement offer. The announcement will be published in Internal Revenue Bulletin 2002-43, dated October 28.

Section 351 contingent liability transactions are shelters in which taxpayers use a subsidiary to generate loss-creating stock transfers as well as certain payments, and thus create a double tax deduction. Taxpayers participating in shelters of this type have until January 2, 2003 to apply for a settlement that may include an evaluation of the merits of the tax claims by a neutral expert. Revenue Procedure 2002-67 addresses the specifics of this settlement offer.

Corporate-Owned Life Insurance (COLI) shelter participants have already been offered a settlement that permits them to keep 20% of the benefits that were claimed. The offer is being discontinued and participating taxpayers will be notified that they have 45 days in which to accept the settlement offer before the settlement program is suspended. IRS Announcement 2002-96 addresses the specifics of this settlement offer. The announcement will be published in Internal Revenue Bulletin 2002-43, dated October 28.

"This effort is a way to resolve cases without months or years of costly litigation while making it clear to taxpayers who may consider participating in abusive tax shelters in the future that they will end up in a bad deal," said IRS Commissioner Charles O. Rossotti.

The IRS estimates that hundreds of taxpayers and billions of dollars are at stake with these shelters. The settlement plan is part of the IRS's ongoing attempt to target and shut down large, expensive tax shelters and the promoters who sell them. "We are committed to stopping the spread of these devices," said Larry Langdon, commissioner of the IRS large and mid-size business division.

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