FROM THE OFFICE OF PUBLIC AFFAIRS

THE PROBLEM: COMPLEXITY & ABUSE

The complexity of our tax code has created opportunities for abuse.  Complexity leads some innovative thinkers to find and exploit loopholes.  These tax avoidance strategies deliberately violate the spirit of our laws and are unfair to the vast majority of taxpayers who do their best to pay their fair share of tax. 

UNPRECEDENTED & AGGRESSIVE ACTION

The Treasury Department and the IRS have undertaken an unprecedented and aggressive effort over the last 2 ½ years to combat abusive tax avoidance.

Increased & Redirected IRS Budget/Resources
The IRS has significantly increased the portion of its resources dedicated to auditing abusive transactions (in part, by issuing guidance to resolve issues that had previously consumed substantial audit resources). These efforts have resulted in a number of significant court victories denying the purported tax benefits of abusive transactions and also have resulted in numerous tax payments by taxpayers who chose not to fight the IRS in court.

• IRS teams have been assembled to implement a comprehensive strategy to deal with questionable transactions. Teams are headed by an LMSB executive and include representatives from Chief Counsel, technical advisors and field specialists.  The Chief Counsel has also created a new senior executive position within the Office of Chief Counsel to focus on potentially abusive tax avoidance transactions.
 
• The President's budget proposes an additional $100 million to support this effort to ensure high-income individuals and businesses have paid the tax they owe. This request is awaiting action by Congress.

Listed Transactions
The IRS and Treasury have identified 27 abusive transactions through formal guidance.  Since January 2001, the Treasury Department and the IRS have identified the following tax avoidance transactions.

• Notice 2003-24 (Collectively bargained welfare benefit funds)
• Notice 2003-22 (Offshore deferred compensation arrangements)
• Rev. Rul. 2003-6 (Abuses associated with S Corp ESOPs)
• Notice 2002-70 (Producer owned reinsurance company)
• Notice 2002-65 (1120-S straddle tax shelter)
• Notice 2002-50 (Partnership straddle tax shelter)
• Rev. Rul. 2002-46 (Employee benefit plan deduction accelerator)
• Notice 2002-35 (Notional principal contracts)
• Notice 2002-21 (Certain inflated basis transactions)
• Notice 2001-45 (Section 302 basis-shifting transactions)
• Notice 2001-17 (Contingent liability transactions)
• Notice 2001-16 (Intermediary transactions)
• Notice 2003-47 (Family limited partnerships)
• Notice 2003-54 (Use of offsetting positions and tax indifferent parties)
• Notice 2003-55 (Lease strips, superceding earlier guidance)

Promoter Audits
The IRS conducts promoter examinations in instances where it appears a promoter has not complied with regulations requiring identification of potentially abusive tax avoidance transactions by registering such transactions, and maintaining or making investor lists available to the IRS upon request.

• The IRS is investigating 112 promoters (some of which are related) including law firms, investment banks and accounting firms.
• Since the beginning of 2002, the IRS has issued 313 summonses in 37 promoters cases (some of which are related) to examine promoters’ compliance with the registration and list maintenance requirements, by requesting information and investor lists.
• Of these summonses, 98 involving nine promoters have been referred to the Department of Justice for enforcement.

John Doe Summonses Issued to Law Firms and VISA & MasterCard
“John Doe” summonses can be used to obtain information on potentially non-compliant taxpayers.  A court order is required to serve a John Doe summons, and the IRS and the Justice Department have been working together to use this important tool in the fight against abusive transactions.

• On October 15, 2003 a federal judge in Illinois issued an order authorizing the IRS to serve a John Doe Summons to Sidley Austin Brown & Wood, asking the law firm to identify taxpayers who may have invested in listed transactions or other potentially abusive transactions organized or sold by the firm’s New York office.
• On June 19, 2003, a federal judge in Illinois issued an order authorizing the IRS to serve a John Doe summons to Jenkens & Gilchrist, asking the law firm to identify taxpayers who may have invested in listed transactions or other potentially abusive transactions organized or sold by the firm's Chicago office.
• On March 27, 2002, a federal judge in San Francisco issued an order authorizing the IRS to serve a John Doe summons on VISA International seeking records on transactions for 1999-2001 using cards issued by banks in over 30 tax haven countries.
• On August 21, 2002, a federal judge in Miami issued an order authorizing the IRS to serve a John Doe summons on MasterCard for records on transactions for 1999-2001 using credit cards issued by banks in over 30 tax haven countries.
• In August and October 2002, federal judges in 18 district courts across the nation gave permission to the IRS to serve John Doe summonses on over 120 businesses to assist in the identification of credit card owners. 

Enforcement Actions Against Accounting Firms
The IRS, working with the Justice Department, is seeking information from accounting firms on potentially abusive transactions promoted by these firms.  The IRS already has reached agreements with two major accounting firms and one major investment bank that will provide the IRS with a significant amount of information on past transactions and ensure future compliance with the promoter rules.

New Disclosure Regulations
The Treasury and IRS have issued revised disclosure regulations that provide clear rules without subjective exceptions. These new rules cover all types of taxpayers and clearly identify who must keep lists of participants in a potentially questionable transaction. These new rules will give the IRS multiple sources of information on potentially abusive transaction.
 
State Partnerships
The IRS has significantly expanded its agreements with the States to share information on potentially abusive transactions.

Legislative Proposals
The Treasury’s legislative proposals will allow for fully consistent disclosure rules and will back them up with meaningful penalties. These proposals also give the IRS important tools needed in its fight against abusive transactions.

• The proposals would fully align the disclosure rules to allow for early disclosure of questionable transactions by promoters.  A taxpayer’s decision to hide a transaction on a return in the hope that it would not be identified and examined will become a risky course of action.
• The proposals would impose penalties of up to $200,000 for the failure to comply with the tax return disclosure rules.  In certain instances, corporations would be required to report penalties to the Securities and Exchange Commission.
• The proposals would confirm the IRS’ ability to seek injunctions against egregious promoters and would put in place time-sensitive penalties to discourage delay tactics by promoters.