The
Treasury's 2003 Offensive
During
2002 the Internal Revenue Service mounted
a Tax Shelter Disclosure Initiative, which
it said was a success, leading to 621 disclosures
covering 947 tax returns, and involving
more than $16 billion in claimed losses
and deductions.
The
initiative was aimed at corporate taxpayers
and wealthy individuals worried that tax
shelters which they were using might be
illegal, but afraid to come forward. In
return for full disclosure regarding the
transactions and details of the schemes,
the IRS promised to waive accuracy-related
penalties which might apply to tax shelter
and other questionable items on a return
at a rate as high as 20%.
'Hundreds
of taxpayers came forward and took advantage
of this opportunity to voluntarily disclose
questionable tax transactions and submit
the names of abusive tax shelter promoters,'
said Larry Langdon, the IRS Commissioner
of Large and Mid-Size Business.
In
May, 2003, the US Treasury Department and
Internal Revenue Service released a final
version of their new rules designed to curb
the promotion and use of abusive tax shelters.
The
rules are intended to update earlier tax
shelter disclosure laws which were too narrow,
and allowed many tax shelter promoters to
slip through the net. However, concerns
were expressed that they will almost certainly
lead to an additional compliance burden
for individual and corporate taxpayers,
who will likely be asked to disclose details
of perfectly legal arrangements.
According
to a Treasury statement, six categories
of potential tax avoidance transactions
are covered. Taxpayers will be required
to disclose and promoters will be require
to maintain investor lists for six categories
of transactions:
-
Listed transactions (i.e., transaction
that have been specifically identified
by the IRS as tax avoidance transactions);
-
Transactions marketed under conditions
of confidentiality;
-
Transactions with contractual protection;
-
Transactions generating a tax loss exceeding
specified amounts;
-
Transactions resulting in a book-tax difference
exceeding $10 million; and
-
Transactions generating a tax credit when
the underlying asset is held for a brief
period of time.
The
US Treasury Department also issued new rules
covering professional conduct known as 'Circular
230'. This was circulated in draft in early
2003, and late in the year the Treasury
confirmed that the stiff draft rules would
be put into force. Assistant Treasury Secretary
for tax policy Pamela Olson explained: "We
initially thought we were going to be making
a lot of changes” to the draft proposals.
"But
after reflecting on what we've seen in the
last couple of years, we don't think we
should be watering these down," added Olson.
"We think we should come out with a strong
set of rules."
The
focus during 2003 was indeed very much on
professionals involved in setting up tax
shelters, both in terms of attacking them
directly, and in terms of trying to force
them to disgorge details of shelters they
have set up for taxpayers, although the
IRS has had only mixed success in this latter
endeavour.
In
June the IRS issued a summons against a
top law firm, ordering it to disclose the
names of 600 wealthy clients that the agency
alleged were sold tax shelter schemes. Chicago
federal judge John W. Darrah approved a
request by the Revenue to issue the summons
against Dallas-based law firm Jenkens and
Gilchrist on the grounds that the firm had
supposedly taken around $72 million in fees
for tax shelter advice, according to Justice
Department papers. Jenkens and Gilchrist
declared that it had no intention of compromising
client confidentiality and would not divulge
details of any of the names contained in
the summons.
Then
in July a three-judge panel at the United
States Court of Appeals for the Seventh
Circuit ruled that accounting firm BDO Seidman
must turn over the names of investors in
tax shelters to the IRS. The court found
that under the US tax code, BDO is obliged
to keep records on tax sheltering arrangements,
and to report to the IRS the indentities
of investors in such schemes. This, the
panel explained, means that investors in
the tax shelters did not have 'an expectation
of confidentiality in their communications
with BDO,' as the accounting firm had argued.
And in October a federal court ruled that
the Chicago office of law firm, Sidley Austin
Brown & Wood must hand over information
about clients who have invested in 13 tax
minimization schemes since 1996. IRS Commissioner,
Mark Everson explained that: "Our actions
show that we will require attorneys who
act as promoters to comply with the law's
requirement that they maintain lists of
investors for certain abusive transactions
and furnish those lists, upon request, to
the IRS."
On
the other hand, one of the IRS's most prominent
targets, KPMG, scored a success in October
when a specially appointed Master recommended
to a federal court that the company did
not have to hand over all the documents
requested by the IRS, according to a Wall
Street Journal report. The IRS was seeking
to enforce 25 summonses that it had sent
to KPMG demanding tax sheltering documentation.
The firm had handed over hundreds of boxes
of paperwork, but had also withheld many
documents, arguing that to lay them open
to scrutiny would be to breach client privilege.
Consequently, in December 2002, the Washington
DC federal court appointed retired US Magistrate
Judge Patrick Attridge to appraise KPMG's
claim and examine the documents in question.
In his judgement delivered on October 8,
Judge Attridge ruled that whilst KPMG must
hand over some of the documents, those that
contained material covered by client-attorney
privilege may be retained by the firm.
Hearings into tax sheltering held by the
Senate Permanent Subcommittee on Investigations
in November, 2003, also gained a lot of
publicity, although they did not lead to
much legislation since they were organised
largely by Democrat senators. The Senate
subcommittee came to the following conclusions:
"First, the investigation has found that
the tax shelter industry is no longer focused
primarily on providing individualized tax
advice to persons who initiate contact with
a tax advisor. Instead, the industry focus
has expanded to developing a steady supply
of generic “tax products” that can be aggressively
marketed to multiple clients. In short,
the tax shelter industry has moved from
providing one-on-one tax advice in response
to tax inquiries to also initiating, designing,
and mass marketing tax shelter products."
"Secondly,
the investigation has found that numerous
respected members of the American business
community are now heavily involved in the
development, marketing, and implementation
of generic tax products whose objective
is not to achieve a business or economic
purpose, but to reduce or eliminate a client’s
US tax liability. Dubious tax shelter sales
are no longer the province of shady, fly-by-night
companies with limited resources. They are
now big business, assigned to talented professionals
at the top of their fields and able to draw
upon the vast resources and reputations
of the country’s largest accounting firms,
law firms, investment advisory firms, and
banks." Well, what a surprise!
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