Problems the IRS Faces in Addressing This Area
Disclosure is an important way for the IRS to identify participants in abusive transactions. However, our disclosure scheme, which originally was developed to address the taxable sector, does not yet fit all tax-exempt participants because the method of reporting does not fit all tax-exempt entities well. For example, an organization must attach Form 8886 to its annual tax return for each year that the organization participates in a listed transaction. For this purpose, “tax return” includes information returns, so tax-exempt entities that file information returns are covered by the regulations. However, entities that are not required to file any return are not covered. This excepted category includes churches, small exempt organizations, state and local governments, state and local government retirement plans, and Indian tribal governments. Thus, these entities are not covered by the section 6011 disclosure net.
Lack of Sanction
Another difficulty in addressing accommodation parties is that IRS has no sanctions comparable to those that can be imposed on promoters or investors. Currently, there is no sanction for a taxpayer’s failure to disclose a reportable transaction under section 6011 of the Code. The Administration has proposed in its FY 2005 Budget legislation that would impose meaningful penalties on all taxpayers that fail to disclose reportable transactions, including listed transactions, on their returns. As noted above, however, not all tax-exempt entities are required to file a federal tax return.
In addition, the accuracy-related penalties imposed by the Code are not sufficient to deter a tax-exempt accommodation party, which neither invests in the transaction nor has taxable income to understate. Finally, IRS’ compliance sanctions for exempt organizations do not fit these situations. Participation in the transaction as an accommodation party rarely will affect the tax status of a charity, qualified plan, or other tax-exempt entity. In the offsetting foreign currency options transaction, for example, the accommodating charity receives some net value. Its receipt of the asset has not changed the organization’s purposes or activities, nor has the receipt of the asset caused the organization to engage in an excess benefit transaction. The abuse is that the transaction is structured to generate a tax benefit for the donor that far exceeds not only the amount authorized by the Code for charitable contributions, but also the net benefit received by the charitable organization.