Developments
in 2004 New
IRS rules on the registering and reporting
of tax shelters have to be taken seriously.
Under the terms of the new registration
rules, advisers are obliged to report to
the IRS any tax minimization products and
services offered which the tax agency has
dubbed 'abusive tax shelters'. The reporting
rules require tax professionals to file
a Reportable Transaction Disclosure Statement
8886 with clients' tax returns for each
year that they have participated in the
tax sheltering arrangement, and with the
Office of Tax Shelter Analysis for their
first year of involvement in the scheme.
The new list maintenance rules require that
tax advisers maintain lists of participants
in so-called abusive tax shelters for possible
future inspection by the tax authority.
In
January, 2004, the Treasury Department announced
a raft of legislative proposals to be included
in President Bush’s 2005 budget aimed at
closing tax loopholes, nullifying tax shelters,
and simplifying the taxation system.
Commenting on the series of new proposals,
which aimed to clamp down on tax abuse on
a broad front, then Treasury Secretary John
Snow remarked: “The laws must ensure that
those who would shirk their civic responsibilities
cannot do so by exploiting unintended loopholes,
and the IRS must ensure that taxpayers do
not engage in abusive tax avoidance transactions.”
“We
are committed to restoring confidence in
the tax system by ending the proliferation
of abusive tax avoidance transactions and
simplifying the tax code,” added Treasury
Assistant Secretary for Tax Policy Pam Olson.
“Ultimately, there is no “silver bullet”
or “one-size-fits-all” solution addressing
abusive tax avoidance transactions — other
than continuing to simplify the tax code
and ensure that the tax results match the
economic realities of the transactions,”
she observed.
Meanwhile, IRS Commissioner Mark W. Everson
hoped that a new policy of tougher penalties
will help to drive home the administration’s
zero-tolerance message, which it intends
to send out with the glut of new proposals.
According to the Treasury, they will seek
to:
-
Impose Penalties on the Failure to Disclose
Potentially Abusive Transactions;
-
Permit Uniform Disclosure Rules for Potentially
Abusive Transactions;
-
Permit Injunction Actions against Promoters
who Repeatedly Disregard the Registration
and List-Maintenance Requirements;
-
Impose a Penalty for the Failure to Report
an Interest in a Foreign Financial Account;
-
Curb Abusive Income-Separation Transactions;
-
Eliminate Obstacles to Disclosure;
-
Increase Penalties for False or Fraudulent
Statements Made to Promote Abusive Tax
Avoidance Transactions;
-
Eliminate Abusive Transactions Involving
Foreign Tax Credits;
-
Stop Abusive Leasing Transactions with
Tax-Indifferent Parties;
-
Require Charitable Deductions to Reflect
Accurately the Value of the Donation;
-
Prevent Misuse of Tax-Exempt Casualty
Insurance Companies;
-
Address the Tax Consequences of Changing
Beneficiaries of a Section 529 College
Savings Plan;
-
Tighten the Deduction Limitation for Interest
Paid to Related Parties;
-
Prevent Avoidance of U.S. Tax on Foreign
Earnings Invested in U.S. Property;
-
Modify Tax Rules for Individuals Who Give
Up U.S. Citizenship or Green Card Status;
-
Curb Frivolous Returns and Submissions;
-
Terminate Instalment Agreements when Taxpayers
Fail to File Returns or Make Tax Deposits;
-
Streamline the Handling of Collection
Due Process Cases;
-
Improve Procedures for Taxpayers Seeking
to Resolve Their Tax Liabilities;
-
Make the Payment of FMS (Financial Management
Services) Fees for Levies More Efficient;
-
Expand the Use of Electronic Filing;
-
Permit Private Collection Agencies to
Support the IRS’ Collection Efforts
“I’m
very pleased the administration is continuing
its attacks on illicit tax shelters,” noted
Senator Charles Grassley. "The administration
should receive high marks for its anti-tax
shelter efforts. It’s issued numerous shelter
regulations over the past year and laid
down a solid response to attacking this
problem. Congress needs to back up these
efforts by passing tax shelter legislation,”
he observed.
Later
in January, tax collectors in twelve states,
including California and New York, met with
representatives from the Federation of Tax
Administrators and the Multistate Tax Commission
to discuss how to combat tax sheltering
on a broad front.
"California
is joining forces with other states to crack
down on abusive tax shelters, and we're
putting our collective resources to work,"
commented Californian State Controller Steve
Westly. "We're going to use the best ideas
from every state to find and prosecute tax
cheats," he added.
The other participating states and cities
include Colorado, Connecticut, Illinois,
Massachusetts, Michigan, Minnesota, New
Jersey, Ohio, Tennessee, and Wisconsin,
as well as New York City.
California also offered a Voluntary Compliance
Initiative for taxpayers who invested in
abusive tax shelters. Taxpayers had until
April 15 to correct their tax returns and
make full payment of the taxes owed or face
new harsh penalties. The Californian Franchise
Tax Board claims the state loses $600 million
to $1 billion in tax money annually through
abusive tax sheltering.
In 2003, 41 states, among them New York
and California, signed a Memorandum of Understanding
with the IRS allowing federal and state
tax collection agencies to pool their collective
information on delinquent taxpayers and
concentrate the battle against abusive tax
shelters.
In
May, 2004, the IRS announced a new amnesty
scheme for taxpayers who may have employed
a tax minimisation technique commonly referred
to as ‘Son of Boss,’ which the agency claims
has deprived the government of some $6 billion
in tax revenues. The
so-called Son of Boss scheme is derived
from an earlier scheme known as ‘Boss’ (bond
and option sales strategy), and was commonly
used in the late 1990s to offset large one-off
gains such as the sale of a business.
However, according to IRS Chief Mark W.
Everson: “Son of Boss deals had only one
purpose – the elimination of tax. These
transactions were developed and marketed
by an interlocking network of commercial
interests, including leading law firms,
accounting firms and investment banks.”
The IRS claims that many transactions undertaken
through Son of Boss schemes generated tax
losses of between $10 million and $50 million
leading to a total understatement of tax
in excess of $6 billion.
Under the terms of the amnesty, which are
a lot less generous than previous amnesty
programs, eligible taxpayers must concede
100% of the claimed tax losses, must pay
all applicable interest and must accept
the imposition of a penalty unless they
had previously disclosed their participation
in the transaction.
However, participating taxpayers will be
allowed to deduct as a loss their out of
pocket transaction costs, typically promoter
and professional fees.
Everson pointed out that taxpayers will
remain able to contest the IRS in court
over such issues, although he warned that
the government will “vigorously pursue the
full tax due”, plus full interest and penalty
payments owing. However, IRS officials revealed
to the Washington Post that taxpayers will
be barred from using the agency's normal
appeals process to contest such cases. Confirming
the agency's tough stance on the subject,
IRS Chief Counsel Donald Korb added that
taxpayers "should not expect to settle court
cases on terms more favorable than those
offered in the IRS settlement initiative.”
Also
in May, law firm Jenkens and Gilchrist was
ordered by a federal judge to hand over
the names of clients who invested in tax
schemes formulated by its Tax and Estate
Planning Practice Group and its Structured
Investment Practice, between June 1998 and
June 2003. The ruling marked the conclusion
of a five year battle between the firm and
the Internal Revenue Service.
Ruling
at the Northern District of Illinois court
on Friday, US District Judge James Moran
granted permission for the law firm's clients
to raise claims of attorney-client privilege.
However, he observed that there "does not
appear to be...sustainable grounds for the
assertion of privilege for the great majority
of client materials", and warned that clients
would be penalised for bringing frivolous
privilege claims.
Ruling
in September in Manhattan's district court
in the case of Seippel v. Jenkens and
Gilchrist, Southern District Judge Shira
A. Scheindlin allowed fraud and recission
claims against the Sidley Austin Brown &
Wood law firm to proceed. Telecommunications
executive, William Seippel participated
in a tax sheltering arrangement known as
COBRA (Currency Options Bring Reward Alternatives),
which was developed by Jenkens & Gilchrist
in conjunction with Brown & Wood, prior
to the latter's merger with Sidley & Austin
in 2001.
Following
an Internal Revenue Service investigation
into the shelter which led to Mr Seippel
and his wife paying more than $5 million
in taxes, penalties and fees, the couple
sued the law firms in question alleging
fraud, infringement of the Racketeer Influenced
and Corrupt Organizations (RICO) Act, legal
malpractice, breach of contract, negligent
misrepresentation, and breach of fiduciary
duty.
Although
Judge Scheindlin dismissed the RICO, malpractice,
breach of contract, negligent misrepresentation
and breach of fiduciary duty claims, she
allowed the fraud and recission of fees
actions to continue, observing that:
"The
fact that the Seippels may not ultimately
owe the tax authorities additional taxes
does not mean that their action is not ripe.
The Seippels allege that they have been
damaged, and continue to be damaged, as
a result of the defendants' conduct."
She
continued: "Their damages include the fees
paid to defendants, losses incurred in the
transactions, expenses paid to accountants
and attorneys that are assisting the Seippels
in defending the audits, losses caused as
a result of being forced to sell assets
at distressed prices to meet tax obligations,
and tax penalties already assessed and paid."
The
IRS scored a success in December when a
federal jury convicted six people in a $120
million tax shelter scheme described by
the authorities as one of the most extensive
cases of its type ever tried. The case involved
the Washington state-based firm Anderson
Ark and Associates, which charged around
1,500 clients fees ranging from $50,000
to $250,000 for tax shelter plans that helped
them take income tax deductions in the period
form 1997 to 2001.
The
schemes, which were sold over the internet,
involved transactions using shell companies
and loans connected to Costa Rican bank
accounts to create the appearance that clients
had legitimate tax-deductible business expenses.
Six defendants were convicted of a number
of offences after the seven-week trial,
including filing false tax returns, mail
fraud, wire fraud, and money laundering.
Welcoming
the verdict, IRS Commissioner Mark W. Everson
noted that the case represents “a real blow
to promoters of shady offshore tax schemes."
The authorities are considering re-filing
charges against four defendants about whom
the jury was unable to reach a verdict.
Rounding
off a busy year for the tax avoidance industry,
the US government issued final regulations
amending Treasury Department Circular 230,
which apply to attorneys, accountants and
other tax professionals who practice before
the IRS, providing standards of practice
for written advice that reflect current
best practices, and are intended to restore
and maintain public confidence in tax professionals.
The
revisions aim to ensure that tax professionals
do not provide inadequate advice, and to
increase transparency by requiring tax professionals
to make disclosures if the advice is incomplete.
Welcoming the new measures, IRS Commissioner
Mark W. Everson commented: “These new standards
send a strong message to tax professionals
considering selling a questionable product
to clients. The new provisions give us more
tools to battle abusive tax avoidance transactions
and to rein in practitioners who disregard
their ethical obligations.”
Ensuring
that attorneys, accountants and other tax
practitioners adhere to professional standards
is one of the IRS’s top four enforcement
goals, and the agency considers the Circular
230 revisions a key component of this strategy.
The final regulations provide best practices
for all tax advisors, mandatory requirements
for written advice that presents a greater
potential for concern, and minimum standards
for other advice.
“These
revisions to Circular 230 strike an appropriate
balance between tightening practitioner
standards and minimizing burden on everyday
advice,” noted Assistant Secretary for Tax
Policy Greg Jenner. “These rules target
the types of written advice that present
a significant cause for concern and avoid
undue interference with the practitioner-client
relationship,” he added.
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