Treasury Finalizes Anti-Tax Shelter Regulations

"By issuing final regulations, we are putting the promoters that sell questionable transactions and the taxpayers that participate in them on notice." These words, spoken by Pam Olson, assistant secretary for tax policy at the U.S. Treasury, mark the start of a new hunting season on tax shelters.

Last Thursday, the Treasury Department issued final regulations that require additional disclosure of tax shelter activities. It is estimated that questionable tax shelters may cost the government as much as $10 billion each year.

The regulations list six categories of potential tax shelter/tax avoidance schemes that must be disclosed:

  1. Transactions that the IRS has designated as tax shelters
  2. Transactions that are characterized as confidential
  3. Transactions that are accompanied by a contractual obligation such as those with guaranteed tax benefits
  4. Transactions that generate a tax loss exceeding certain amounts
  5. Transactions that produce a book/tax difference of more than $10 million
  6. Transactions that generate a tax credit where the underlying asset is held for fewer than 45 days

Ms. Olson also indicated she is confident Congress will authorize steep penalties for failures to disclose the types of transactions covered by the regulations. Speculation is that penalties will be as high as $200,000 for both tax shelter promoters and participants.

The new regulations are effective Friday, February 28, 2003. You can read the complete text of the new regulations.