FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you all for being here this afternoon. Secretary O'Neill is currently in Mexico, but he joins us in spirit--and in a statement. I would like to thank Commissioner Rossotti for being here today as we announce Treasury's enforcement proposals to curb abusive tax avoidance transactions.

Abusive tax avoidance transactions are not structured for business reasons but instead are structured to take advantage of a complex tax code to obtain tax benefits that Congress did not intend. These transactions must be curbed because they violate Congress' intent, harm the public fisc and erode the public's sense of fairness.

As I said at my confirmation hearing and in several public speeches since, this Administration will continue to seriously examine the issue of abusive tax avoidance transactions and how best to step up enforcement against them. I asked for time to review the results of the first filing season of the new rules put in place in 2000. The results are in. We now have received and reviewed the first year of filings of disclosures. We are disappointed in the number and types of transactions disclosed. Today, we are proposing significant regulatory and legislative changes to enhance enforcement of the law.

The current rules for disclosing, registering, and maintaining customer lists for tax shelter transactions differ dramatically, which creates complexity for some, and opportunity for others. The vast majority of taxpayers and practitioners do their best to comply with the letter and spirit of the laws. Some, however, are actively promoting or engaging in transactions structured to generate tax benefits never intended by Congress. All taxpayers have a stake in the government's success in establishing rules that assist in identifying and addressing these transactions.

Transparency - that is, ensuring that questionable transactions are disclosed and subjected to IRS review - is critical to the Government's ability to identify and immediately address abusive tax avoidance practices.

Our Legislative and Administrative Proposals will change the risk/reward analysis for taxpayers who would enter into questionable transactions and play the audit lottery to avoid paying their fair share of taxes. We are simplifying disclosure rules to eliminate gray areas that have been used to avoid disclosure, and imposing new penalties on promoters and taxpayers for failure to disclose.

Simply put, if a taxpayer is comfortable entering into a transaction, a promoter is comfortable selling it, and an advisor is comfortable blessing it, they all should be comfortable disclosing it to the IRS.

Together, these steps to simplify compliance and raise the cost of noncompliance will provide us with more information about the misuses of our tax code, so that we can work with Congress to correct them. We are deliberately casting a broader net with our legislative and administrative proposals than exists under the current rules.

The Treasury Department's initiative will build upon ongoing Treasury Department and IRS efforts to combat abusive tax practices. Recent actions have focused on both individual and corporate tax avoidance transactions, and on both taxpayers and promoters.

• The IRS announced in December 2001 a limited-time program to encourage disclosure of questionable transactions. A taxpayer who discloses a transaction, and who identifies all promoters of the transaction, will avoid accuracy-related penalties. The taxpayer, however, will still be liable for interest on any underpayment of tax. To date, almost 150 transactions have been disclosed, including many that the IRS already has identified as tax avoidance transactions. Along with this disclosure initiative, the IRS issued penalty guidelines for all tax avoidance transactions that require the full, fair, and consistent consideration of penalties.
• The Treasury Department and the IRS are working closely together to streamline the evaluation of transactions, including the determination of whether a transaction should be identified as a listed (i.e., tax avoidance) transaction for taxpayer disclosure purposes.
• The Treasury Department and the IRS are working to re-deploy additional resources to deal with tax avoidance transactions and have increased their coordination with the Department of Justice.
• The IRS is working actively to obtain transaction and investor information from some 30 promoters of tax avoidance transactions. These efforts have and will continue to include the use of judicial summonses for those promoters who prove reluctant in providing this information.
• The IRS, in coordination with the Department of Justice, is working to shut down the promoters of abusive tax schemes directed primarily at individuals and small businesses. Courts already have issued six injunctions, and a number of additional cases are pending.
• The IRS is investigating a major abusive tax avoidance scheme used by individuals to evade U.S. tax by placing assets in banks located in foreign tax havens. Thousands, and potentially tens of thousands, of individuals are participating in these schemes. Through judicial summonses, the IRS is working to identify these individuals and is in the process of initiating enforcement action, including audits and criminal actions.
• Treasury and the IRS recently published a notice warning taxpayers that the IRS will challenge transactions using a loan assumption agreement to claim an inflated basis in assets acquired from another party.
• Treasury and the IRS recently published a notice warning taxpayers that the IRS will challenge transactions improperly shifting basis from one party to another.
• Treasury and the IRS recently published a notice announcing Treasury's intention to promulgate regulations that prevent the duplication of losses by a consolidated group.
• Treasury and the IRS recently published final regulations on hedging transactions that prevent employers from deferring tax on income from investments used to fund deferred executive compensation.
• Treasury is actively pursuing, and has had remarkable success in obtaining, tax information exchange agreements with offshore financial centers. These agreements allow us to pursue information on civil and criminal tax evaders even when countries have bank secrecy laws.

Ultimately, to address these abusive tax avoidance transactions, we have to get at the heart of the problem-the complexity of the tax Code. Our complex tax system must be re-evaluated and simplified, so that the opportunities for abusive tax practices that currently exist are eliminated.

Until abusive tax avoidance transactions can be addressed by simplifying the tax Code, the Treasury Department and the IRS will continue to use these simplified and strengthened rules for disclosure, registration and list maintenance to eliminate abusive tax avoidance transactions.