The Internal Revenue Service (IRS) announced last week that taxpayers have until January 23, 2006 to file an election form to take part in the global settlement program for 21 specified transactions, and there will be no deadline extension. Interest on tax due as part of this settlement has been exempted from the interest calculation rules changes for abusive tax shelters passed by Congress in the Gulf Opportunity Zone Act of 2005.
The new Act provides that interest on additional taxes involving abusive tax shelter transactions will now start with the filing of the tax return and continue until the
time the taxes are settled and paid. Previously, interest was suspended for the period beginning 18 months after the filing, until October 3, 2004. Taxpayers who chose to close out a transaction as part of the settlement initiative will be exempt, on a one-time only basis, from the additional interest.
The initiative, described in Announcement 2005-80, describes the 21 transactions eligible for the program. Sixteen are listed transactions and five are transactions that the IRS is concerned about.
When it announced the program in October 2005, the IRS said that it had identified 4,000 taxpayers involving the 21 transactions and was continuing to uncover additional participants through tax returns examinations and the agency's promoter audit program.
The settlement requires that participants, both individuals and companies, concede that the transactions have no merit. The taxpayer will pay 100 percent of the taxes owed, interest, and penalties of either 50 percent or 25 percent of the tax, depending on the transaction.
The eligible transactions are divided into three groups according to the level of penalty involved. The first group of six transactions for which the taxpayer will incur penalties of 50 percent includes schemes such as Tax Avoidance Using Inflated Basis, Accounting for Lease Strips And Other Stripping Transactions, Tax Avoidance Using Offsetting Foreign Currency Options and Tax Avoidance Using Distributions of Encumbered Property. The second and third groups will result in penalties of 25 percent and include a wide range of transactions involving pension plans, Employees Stock Ownership Plans, advance reimbursements for medical expenses, and questionable charitable contributions of property and patents.
There is penalty relief if the transactions were disclosed to the IRS or where the taxpayer got a tax opinion from an independent tax advisor. Transactions costs paid by the taxpayer to do the deal, including professional and promoters' fees, will be allowed.
Taxpayers should provide information to the IRS with the Election Form that allows the IRS to determine eligibility and tax, interest and penalties due.
The program follows the terms of prior settlements, including Son of Boss transactions and schemes involving transfers by executives of stock options to family controlled entities, the IRS says.