- 4.32.1.1 Introduction
- 4.32.1.2 Guiding Principles
- 4.32.1.3 Emerging Issues
- 4.32.1.4 Issue Management Team
- 4.32.1.5 Activities of the Issue Management Team
- Exhibit 4.32.1-1 Glossary of Terms
- Exhibit 4.32.1-2 Guiding Principles for Developing Investor Penalty Resolution Strategies
- Exhibit 4.32.1-3 Guiding Principles for Consideration of Designation for Litigation of Issues in Investor Cases as Part of a Resolution Strategy
- Exhibit 4.32.1-4 Guiding Principles for Consideration of Transaction Costs of Investors in Resolution Strategies
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This process guide has been created to assist those employees, managers, and executives working on abusive tax avoidance transactions and promotions. It is intended to facilitate servicewide communication and coordination in the identification and investigation of abusive transactions and promotions so that these abuses are handled in the most effective and strategic manner possible.
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The Service continues to identify new types of abusive tax avoidance transactions and promotions requiring different levels of coordination and varying strategies. This guide outlines operating standards for both the highly complex and technical abusive tax avoidance transactions and those abusive transactions that are considered scams/promotions based on the erroneous application of tax law or clearly frivolous arguments.
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Before a recommendation for combating abusive tax avoidance transactions and promotions can be developed that is consistent with sound tax administration objectives, it is critical that the scope of the issue, transaction variations, potential case inventory, and the appropriate legal arguments are identified and explored. Because of their possible complexity and monetary significance, proper coordination of abusive tax avoidance transactions and promotions is vital to effective tax administration. Compliance personnel in one or more Operating Divisions, Appeals, and Counsel should be involved in coordinating efforts around each issue identified. In addition, contact should occur with the Department of Justice and the Department of Treasury as appropriate to communicate information on issues and to share positions being developed.
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There are a variety of abusive tax avoidance transactions and promotions ranging from the highly complex transactions to the scams/promotions; both can affect either a large number of taxpayers or only a few taxpayers. To fully understand a specific transaction/promotion and to develop an effective response, it is essential that appropriate communication and coordination take place servicewide.
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To facilitate the effective servicewide communication and coordination of abusive tax avoidance transactions, the Servicewide Abusive Transaction (SAT) Executive Steering Committee (ESC) was formed. The SAT ESC is made up of executives from Counsel, Appeals, Criminal Investigation, and the Operating Divisions and provides servicewide oversight for the IRS response to abusive tax avoidance transactions, promotions and devices. This committee is jointly chaired by the Director, Pre-filing and Technical Guidance (LMSB) and the Director, Examination (SB/SE). The SAT ESC reports to the Enforcement Committee and provides briefings and updates to the Enforcement Committee as needed.
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The guiding principles that should be followed throughout the process of identifying and developing issues related to abusive tax avoidance transactions and promotions are as follows:
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Understand the transaction.
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Get the right people to the table at the right time.
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Respect each function’s role in the administrative process.
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Develop a Servicewide strategy to address the abusive transaction/promotion.
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Understanding the transaction/promotion is critical to the development of a successful strategy for combating all abusive tax avoidance transactions and promotions. Compliance, Appeals, and Counsel need to completely understand the transaction/promotion and its variations. It is vital that individual transactions be reviewed so that the legal positions can be properly accessed based on the facts of an actual case rather than relying solely on the facts provided as part of a legal opinion or a promoter offering. Each transaction/promotion must meet a minimum standard of factual development to ensure proper application of legal theories and to assure design of appropriate case strategies.
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It is critical to get the participation of all interested/involved parties for both gathering information about an identified transaction/promotion and developing strategies for addressing the abusive transactions/promotion. Depending on the particular issue, these efforts may need to include representatives from various Operating Divisions, Criminal Investigation, Appeals, and multiple components of Counsel and Treasury.
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If, in the case of a transaction/promotion affecting only one Operating Division, the Operating Division determines that a strategic Division-wide compliance approach is required or if in the case of a transaction/promotion affecting only one Operating Division, the Operating Division determines that a strategic Division-wide compliance approach is required or if the Servicewide Abusive Transaction (SAT) Executive Steering Committee (ESC) determines that an issue warrants a strategic Servicewide compliance approach, an Issue Management Team will be formed to discuss and develop a Division or Servicewide strategy for addressing the issue. These teams should consider a wide range of available options for combating the abusive transaction/promotion including:
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Published Guidance
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Audit Techniques Guides
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Audit Resource Guides
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Litigation Designation
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Appeals Settlement Guidelines
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Fast Track Process
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Delegation Order 4-25, Settlement Offers, Closing Agreements, and Settlement Agreements under Section 6224(c) in Cases with Technical Advisor (TA) Program Issues, and Appeals Technical Guidance Program (Compliance Coordinated and Appeals Coordinated) Issues
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Specific Resolution Strategy including Collection Strategy.
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This section details information relating to emerging issues.
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Emerging issues (potentially abusive tax avoidance transactions) are generally identified, consolidated, and elevated as necessary within each IRS Operating Division (LMSB, SB/SE, and TE/GE). When an Operating Division thinks that an emerging issue warrants review and consideration for treatment as a listed transaction, the emerging issue is brought to the Office of the Senior Counsel to the Chief Counsel (Senior Counsel's Office).
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Information about emerging issues is received from various sources, including but not limited to:
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The LMSB Office of Tax Shelter Analysis (OTSA)
(1) Disclosures filed under Treas. Reg. 1.6011-4, Requirement of Statement Disclosing Participation in Certain Transactions by Taxpayers.
(2) Tax shelter registrations filed under IRC §6111, Disclosure of Reportable Transactions. (The title of IRC §6111 before October 23, 2004 is Registration of Tax Shelters.)Note:
IRC §6111 was significantly amended by the American Jobs Creation Act of 2004 (Pub. L. No. 108–357). For example, organizers and sellers are no longer required to register tax shelters under IRC §6111. The changes, including the title change, are effective for advice and assistance provided after October 22, 2004.
(3) Tax Shelter Hot Line. -
The SB/SE Lead Development Center (SB/SE LDC).
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Promoter investigations and requests for information under IRC §6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees, etc. (The title of IRC §6112 before October 23, 2004 is Organizers and Sellers of Potentially Abusive Tax Shelters Must Keep Lists of Investors).
Note:
IRC §6112 was significantly amended by the American Jobs Creation Act of 2004 (Pub. L. No. 108–357). The changes, including the title change, are effective for advice and assistance provided after October 22, 2004.
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Taxpayer/Investor examinations.
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Field information from examiners (e.g., surveys).
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Confidential informants.
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Associate Chief Counsel and Division Counsel Offices.
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Media (e.g., newspaper articles).
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Information from taxpayers, practitioners and special interest groups.
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Department of Treasury, Office of Tax Policy (Treasury OTP).
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Congress.
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Each Operating Division, working with its respective Division Counsel, will review information on potential emerging issues and decide whether to raise particular issues with the Senior Counsel's Office. In deciding whether to raise a potential emerging issue with the Senior Counsel's Office, consideration is given to the potential impact the issue may have from an Examination or Division Counsel perspective, such as the number of identified cases, the dollars at issue, the nature of the transaction, the nature and extent of the potential abuse, and the ease with which the transaction can be duplicated or marketed.
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Each Operating Division and Appeals has an office or group identified for handling potential emerging issues within its jurisdiction and is the primary contact with the Senior Counsel's Office on emerging issues. All field referrals should be routed to one of these primary contacts. These offices/groups are as follows:
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TE/GE - Office of Senior Technical Advisor
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SB/SE - Director, Abusive Transactions
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LMSB - Office of Tax Shelter Analysis
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Appeals - Director of Technical Guidance
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Generally, when an Operating Division decides to elevate an Emerging Issue for Chief Counsel review, the Emerging Issue is referred to the Operating Divisions's respective Division Counsel, who then will forward the Emerging Issue to the Senior Counsel's Office. On an ad hoc basis, at the request of an Operating Division, Division Counsel, or the Senior Counsel's Office, a meeting may be held to discuss Emerging Issues that may be or have been referred to Counsel for review. The Emerging Issue meeting will include representatives from LMSB, TE/GE, SB/SE, and their respective Division Counsels, and the Senior Counsel's Office.
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For issues referred to the Senior Counsel's Office for review, Division Counsel will provide copies of relevant disclosures, registrations, promotional materials and other documents containing information about the facts and mechanics of the transaction. For issues introduced by the Senior Counsel's Office, any information received from sources such as the Associate Chief Counsel offices and Treasury will be shared with the Operating Divisions.
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After receiving information on an Emerging Issue, the Senior Counsel's Office will review the information related to each issue/transaction and coordinate with the appropriate Associate Chief Counsel offices(s) to determine whether to recommend identifying the Emerging Issue as a listed transaction. If appropriate, the Senior Counsel will recommend to the SAT ESC that it form a Task Force to consider the legal and factual issues presented by the transaction and determine if the tax result claimed by the promoters/taxpayers is consistent with the applicable law and regulations. If formed, the Task Force will be a working group that examines the issues and develops the additional information necessary to determine whether the transaction should be identified as a listed transaction. The Task Force will generally start as a small group and expand as necessary. Normally, the Task Force will include representative(s) from Associate Chief Counsel office(s), Technical Advisor(s)/ATAT Program Manager(s) or other Operating Division personnel, Division Counsel(s), and the Senior Counsel's Office.
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An essential part of evaluating an Emerging Issue is to develop transactional information. Consequently, the Senior Counsel's Office or the Task Force, working with the appropriate Division Counsel and Associate Chief Counsel, may request additional information from those Operating Divisions with the ability to provide or obtain additional information about the transaction. Additional information from taxpayer or promoter examinations, Treas. Reg. §1.6011–4 disclosures, or material advisor disclosures may be requested. In certain cases, additional information from external sources such as taxpayers or promoters may be requested. In the case of a promoter not under examination, if there is the conclusion that is likely to be a reportable transaction under Treas. Reg. §1.6011–4, Counsel or the Task Force may request the appropriate Operating Division (by working through the Division contact identified in 4.32.1.3.1(4) above) to seek list maintenance information on the transaction under IRC §6112.
Note:
IRC §6111, IRC §6112 and the rules regarding reportable transactions were significantly amended by the American Jobs Creation Act of 2004 (Pub. L. No. 108–357). The changes, including title changes, are effective after October 22, 2004.
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During the evaluation period, the Senior Counsel's Office will keep the Division Counsel that forwarded the referral from the Operating Division and the SAT ESC apprised of the status of Emerging Issues referred to the Senior Counsel's Office for review.
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After evaluating the Emerging Issue, the Senior Counsel's Office will develop a course of action that represents the Office of Chief Counsel's recommendation for the Emerging Issue. These recommendations may include, but are not limited to, one or more of the following options:
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Identifying the transaction as a listed transaction, issue a notice (or other guidance) alerting the public that the transaction is being scrutinized by the IRS, or issue guidance such as a revenue ruling that states the IRS's position on the issue.
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Recommending a change to a statute or regulation (if this option is selected, the appropriate Associate Chief Counsel Office(s) will work directly with Treasury OTP concerning any changes recommended).
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Pursuing viable issues on a case specific basis because the issues are inherently factual.
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Suggesting that the transaction should no longer be pursued.
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The Senior Counsel will present the recommended course of action to the other members of the SAT ESC, and will identify the office in Chief Counsel that will be responsible for carrying out the recommendation if it involves published guidance. For Counsel office with subject matter jurisdiction will be the Chief Counsel office responsible for developing the revenue ruling.
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While Counsel is considering the legal strategy for an Emerging Issues and determining if the transaction should be listed, representatives from the affected Operating Divisions will continue to identify and work inventory and assess the extent of cross-divisional impact. Many abusive tax avoidance transactions/promotions involve a significant number of taxpayers under the jurisdiction of more than one Operating Division, thus necessitating ongoing coordination among the Operating Divisions to ensure consistency of taxpayer treatment. In some cases the Emerging Issue under consideration involves primarily taxpayers in only one Operating Division. Accordingly, that Operating Division will be responsible for coordination and most decision-making efforts. However, the decision making process should always include input from other Operating Divisions (as appropriate) and Counsel (Division and Associate offices, as appropriate). The Operating Division responsible for handling an issue may form an Issue Management Team (as described later in this IRM) to oversee the issue or use existing administrative processes.
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If the identified transaction is abusive and widespread, the issue should be referred to the SAT ESC to determine if a Servicewide strategic response or a cross-divisional Issue Management Team is needed. See IRM 4.32.1.4, Issue Management Team, for further discussion of Issue Management Teams.
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If the SAT ESC decides that the issue does not warrant a Servicewide strategic response at this time, the issue can be further developed and resubmitted to the SAT ESC, handled through the normal field processes, or handled with the assistance of a division Issue Management Team.
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As emerging issues in the tax shelter area are developed, they may result in a Notice or other published guidance being issued officially listing the transaction as a tax shelter. When this occurs, the listed transaction will be treated as a coordinated issue as of the date the listing notice is issued.
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A memorandum will be issued by the responsible Division Commissioner to affected operating units. The memorandum will contain the name of the Issue Champion, the Technical Advisor/Issue Specialist to contact and attach a copy of the listing notice, and the related plain meaning statement.
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If the listed transaction surfaces during an examination it must be raised as an issue following the guidance position. Examiners should contact the Technical Advisor/Issue Specialist and provide the name of the taxpayer, taxable period(s) involved, type of listed transaction, the name of the promoter, if known, the name and telephone number of the Team/Group Manager and, if applicable, the name and telephone number of the Team Coordinator. The initial contact may be via e-mail (utilizing secure messaging), fax or telephone.
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Examiners should consult with the Technical Advisor/Issue Specialist and Counsel on the development of the issue. Examiners must secure the concurrence of the Technical Advisor/Issue Specialist if their examination deviates from any mandated specific examination techniques proposed for the issue development or their proposal for adjustment deviates from any stated legal position. Examiners must also consult with and secure the concurrence of the Technical Advisor/Issue Specialist and Counsel before proposing any resolution other than full concession of the issue by the taxpayer. No proposals can be made without the concurrence of the Issue Champion.
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After the initial published guidance is released, the responsible division and Chief Counsel staff will meet to discuss the need to further develop the issue. Discussion will include whether there is a need for Counsel to provide a thorough legal analysis of the issue or other guidance. If additional guidance is needed, an issue team should initiate work on an abbreviated coordinated issue paper. An Associate Chief Counsel will be assigned primary responsibility for preparing the legal analysis portion of the paper. That Associate office will work with the issue team on the analysis and coordinate with other Associates as necessary. The issue team should regularly coordinate with Chief Counsel staff during the development of the CIP.
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When the draft CIP is ready for clearance, expedited 30 day clearance procedures will be used. Counsel should coordinate with the issue team during the review process.
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If an examiner identifies a new or unique abusive promotion or transaction during an examination, the case will be discussed with the Group Manager. A Policy Technical Adviser (TA) will be consulted and consideration will be given to the materiality, scope, and estimated impact of the issue. If the promotion or transaction appears to be an emerging issue, the examiner will get assistance from the Policy TA to obtain all available information about the nature of the promotion/transaction and to attempt to identify the promoter. If it appears the issue is a promotion that can be handled at a Campus, the examiner, in conjunction with the Policy TA, will contact the Frivolous Return Program Senior Technical Coordinator at the Ogden Campus and forward the identifying information to them. The information will be used for development of screening criteria to identify additional workload that can be investigated by the Frivolous Filer Unit or CORR Exam. However, if the promotion has a promoter, the examiner will attempt to obtain identifying information for the promoter and forward the promoter information to the SB/SE Lead Development Center (SB/SE LDC) or the Office of Tax Shelter Analysis (OTSA) in LMSB, depending on the promoter.
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If cases involving an emerging issue will be worked in field operations, the Policy TA will size the issue and determine if the examiner should work the cases with assistance from the Policy TA or if an Issue Management Team (IMT) should be formed. If the TA determines the issue is appropriate for formation of an SB/SE IMT, the procedures described in IRM 4.32.1.4, Issue Management Team, will be followed. If it is determined that the issue involves complex abusive transactions and/or is widespread, consideration should be given to presenting the issue at the next OSC Emerging Issue Meeting and/or referring the issue to the SAT ESC for consideration.
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Once the SAT ESC approves the development of a strategic servicewide response to a specific abusive tax transaction, or a Division approves the development of a strategic Divisionwide response, an Issue Management Team will be established. The purpose of the group would be to gather information and develop a Division or Servicewide strategy to address the transaction.
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Initially the team should include:
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Issue Champion(s)
The Issue Champion(s) will be from Compliance and may represent IRS with external stakeholders and coalition groups. It is important that this Issue Leader consider the interests of all internal and external stakeholders in the work of the team. The Issue Champion(s) will be responsible for maintaining the momentum of the team and in collaboration with the team establishing additional sub-teams, as well as establishing and managing milestones. The Issue Champion(s) will come from the Operating Division determined to be the lead for the issue or from multiple Operating Divisions if a clear lead division is not identified. -
Technical Advisor (TA) or equivalent from Compliance.
The TA assists in the identification of the inventory, has knowledge of the factual scenarios for the issue and the legal arguments raised by taxpayers and their representatives, assesses proposed resolutions in terms of administration and application, provides communication links to the field, the Appeals Technical Guidance Program (TGP), and to the working group, drafts (with Counsel) the Coordinated Issue Paper (CIP), and works with Counsel to identify potential cases to designate for litigation. -
Appeals Technical Guidance Coordinator (TGC).
The Appeals TGC representative identifies the inventory in Appeals, develops knowledge of the factual scenarios for the issue and the legal issues raised by taxpayers and their representatives, provides input into the assessment of the proposed resolution in terms of administration and application, provides communication links throughout Appeals and to the working group, and drafts Appeals Settlement Guidelines (ASG) that reflect the hazards of litigation.
Once the ASG is approved by the Director of Technical Services in Appeals, it provides the basis for any settlement initiative offered to investors. Resolutions at any point in the administrative process should conform to the settlement guidelines reflected in the ASG. -
Representative from the Division Counsel Office.
Division Counsel personnel assist in the identification of the inventory and provide expertise related to the factual scenarios of the issue, the legal issues raised by taxpayers, and the appropriate application of legal positions. The Division Counsel also provides communication links to field operations, and participates in the drafting of any Coordinated Issue Paper (CIP), Audit Technique Guide (ATG), proposed published guidance or proposed resolution document. In addition, the Division Counsel works with the Operating Division to assist in the identification of potential cases for litigation designation.
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Other members that may be included on the Team at any point as needed are:
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Representative from Lead Division field office or from field offices of other Operating Divisions depending on the level of technical/operational support needed for example, Technical Services..
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Representative from Criminal Investigation Division either as a point of contact or as a full member depending on the issue or stage of case development.
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Representative from Office of Senior Counsel to the Chief Counsel (OSC) when OSC is actively involved in developing the legal analysis or any published guidance for the issue.
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Representative(s) from Associate Chief Counsel depending on the transaction and proposed strategies. Representatives may be needed from various Associate Offices having subject matter expertise and/or procedural expertise such as summonses and closing agreements. The subject matter experts selected as working group members will vary with each issue; however, careful consideration should be given to ensure that all appropriate offices are represented. Generally, the subject matter expert should be a full time member of the working group; however, in some circumstances a subject matter expert may participate as a consultant in a limited area only.
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Representative from Collection.
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Other Specialists when necessary.
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Activities of the Issue Management Team are broken into three main phases:
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Information Gathering
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Analysis
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Product Development
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Each cross-divisional Issue Management Team will be required to report to the SAT ESC periodically. The first reporting is due within 30 days after the initial team meeting. The purpose of the first briefing will be to insure that the composition of the groups includes all the necessary members and that the Team has assumed an appropriate direction (i.e. whether it should consider an alternative or pursue an alternative resolution approach such as Delegation Order 4-25). After the initial briefing the Team will report to the SAT ESC every 90 days or as requested by the SAT ESC until it has a resolution proposal accepted by the Committee, or the Team has otherwise concluded its business (See IRM 4.32.1.5.3, Product Development).
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In this phase, information will be secured from many sources. The team must have primary contact with examiners, attorneys, and representatives from the Operating Divisions who are actively working the transaction. The team will gather as much specific information as possible about the abusive transaction and any particular variations used by different entities. All field requests for information regarding the transaction must be coordinated through the Compliance and/or Appeals team member. While information gathering is ongoing, Counsel will continue with development of legal arguments and the Operating Divisions will continue with necessary field case development and Appeals will continue to resolve those cases in their jurisdiction.
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In this phase the respective Operating Divisions will have extensive communication to expand their collective knowledge of the issue, its factual variations, and the applicable legal provisions. Also in this phase, Division Counsel in coordination with Associate Chief Counsel, will provide a written summary of the legal arguments it would expect to advance in the event of litigation and will advise Compliance and Appeals of the legal position the Service intends to pursue. This legal position will serve as the basis for providing appropriate case advice to Compliance field personnel as it relates to factual development and legal arguments and for assessing by Appeals the possible litigating hazards.
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Once Counsel has developed a legal position, Compliance will draft the Coordinated Issue Paper (CIP). Compliance should provide a full factual/legal discussion reflecting the Government’s position as early as possible. The draft of this document should be shared with Counsel and Appeals to encourage open dialogue on the identification of additional issues and/or the need for further issue development. This document will also serve as the foundation for an Appeals Settlement Guideline (ASG). As Compliance identifies alternative issues or reassesses an issue in response to litigation, they will consider revisions to the Coordinated Issue Paper (CIP). Once Compliance has an approved Coordinated Issue Paper (CIP), Appeals will complete a draft ASG for the issue within six months. The ASG will cover each of the issues raised in the Coordinated Issue Paper (CIP).
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Consideration by Appeals of the position of affected taxpayers. This consideration can be arrived at in various approaches that are tailored to the transaction under consideration. That approach can include one of more of the following:
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Considering in process cases in the field. This includes a review of case files, taxpayer/representative submissions, promoter/third party opinions, documents, etc.
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Attending taxpayer/representative conferences in the field. Appeals can invite taxpayers/representative to meetings on "in process" Compliance cases. The notification/presence of taxpayers would obviate any ex parte concerns. Appeals can interact with the taxpayers/reps in this forum and engage in an open discussion on the facts and legal issues.
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Coalition meetings-arranged through the Compliance Issue Champion or by Appeals through a separate invitation.
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Invitation for written submissions from the representatives in response to the CIP or equivalent document.
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If the issue is not already coordinated by Compliance, Appeals will consider elevating it from an emerging issue to an Appeals Coordinated Issue (ACI) as the number of cases in Appeals increases. This will ensure consistency in settling cases by providing the Appeals Technical Guidance Coordinator with review and concurrence authority. Granting this authority means the Technical Guidance Coordinator must approve all Appeals settlements involving the issue.
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During this phase Compliance will also designate a Technical Adviser (TA) for the issue. The TA will be tasked with identifying the inventory, assisting examination teams, developing expertise on the specific transactions, identifying variations in the transactions, and making recommendations for coordination requirements. For emerging issues, Compliance will coordinate the issue and recommend the identification and appointment of a TA for a specific issue when the issue and inventory is appropriately developed. To ensure consistency in issues raised by Compliance and the subsequent factual development, the TA will provide assistance to the field examination teams. The assistance may include case visits, development of Resource Guides, and providing updated information to the field as the issue develops. Strong coordination by the TA coupled with an ongoing revision of the Coordinated Issue Paper (or similar document) should insure the delivery of cases into the administrative stream reflecting not only a consistent approach to the abusive transaction but with a common level of factual development as well. Ensuring consistency in case development is fundamental to maintaining a level of consistency in case outcomes.
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If an abusive transaction is egregious, the TA will assist Field Counsel in identifying cases that may be appropriate to designate for litigation. As appropriate cases are identified, the TA will support development of the issue.
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In the product phase, the objective of the Issue Management Team is to develop proposed resolution and settlement approaches to specific abusive tax avoidance transactions considering the legal and factual basis for the position and the inventory of cases involving the issue. The Team is responsible for developing a proposed framework for resolving the abusive tax transaction issue, including the terms and methodology of the resolution. Any proposed resolution must reflect overall good tax administration and consistency in approach. The resolution must reflect the hazards of litigation and advance legally supportable positions. The conclusion of the Issue Management Team may be that the established resolution processes already in place are sufficient for handling a particular issue (i.e. a Coordinated Issue Paper, Appeals Settlement Guidelines and application of Delegation Order 4-25, Settlement Offers, Closing Agreements, and Settlement Agreements under Section 6224(c) in Cases with Technical Advisor (TA) Program Issues, and Appeals Technical Guidance Program (Compliance Coordinated and Appeals Coordinated) Issues, Fast Track Dispute Resolution, Early Referral, expanded Delegation Order 4-25, or Form 1254, Examination Suspense Report). However, the Issue Management Team may determine that a specific resolution initiative is appropriate. This approach allows an acceleration of Appeals’ consideration of the issue, and an opportunity for those investors wishing to resolve their tax controversies to do so early in the administrative process. Team representatives from each division will be designated to inform their respective leadership of these proposals.
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When a specific resolution initiative is finalized, the Issue Champion(s) for the Team will present their proposals to the SAT ESC. The purpose of this presentation is to secure the support of the ESC for elevating the proposed resolution to the Enforcement Committee for final approval. It is critical that the SAT ESC review and concur with all resolution proposals to help ensure resolution consistency for all issues Servicewide and to provide the ESC with the basis to act as an advocate for the proposal with the Enforcement Committee. Both the SAT ESC and the Enforcement Committee have committed to consider all resolution proposals on an expedited basis using conference calls if the regularly scheduled meetings will not meet necessary time frames. Issue Management Teams, through their Issue Champion(s), will provide an executive summary of all resolution proposals for discussion with the SAT ESC and the Enforcement Committee as needed.
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Issue Management Teams should follow the guidance provided by the Enforcement Committee in developing broad resolution strategies for cases involving abusive tax avoidance transactions. This guidance is provided in the form of Guiding Principles for the three specific areas listed below:
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Penalties (see IRM Exhibit 4.32.1-2, Guiding Principles for Developing Investor Penalty Resolution Strategies)
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Designation for Litigation see IRM Exhibit 4.32.1-3, Guiding Principles for Consideration of Designation for Litigation of Issues in Investor Cases as Part of a Resolution Strategy)
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Transaction Costs (see IRM Exhibit 4.32.1-4, Guiding Principles for Consideration of Transaction Costs of Investors in Resolution Strategies)
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In the resolution process there are several items that need to be considered for development. The Issue Management Team will work with Chief Counsel in preparing the following products for issuance:
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News Releases
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Announcements
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Internal and external communication packages.
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Timeliness for activities to be performed.
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In discussing prior resolution strategies with Issue Champions the following areas were identified as being some of those needing consideration:
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Perspective of various parties on public versus non-public resolution prior to decision being made.
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Clear definition of taxpayers to be included in the resolution (for example Chief Counsel definition of those substantially similar to a listed transaction and allowed to participate in the resolution strategy).
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Case closing procedures (for example through one Technical Services Branch).
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Reporting and data capture process for interim reporting.
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Linkages with other abusive transactions and impact on resolution proposal or those allowed to participate.
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| Term | Definition |
|---|---|
| Abusive Tax Shelter | Specific tax transaction/promotion that "shelters" income from normal taxation by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law (tax evasion). The term Abusive Tax Shelter is commonly used to mean an abusive tax transaction/promotion that is highly technical and represents a strategy that is often marketed by an accounting or law firm. These transactions may sometimes be referred to as "abusive promotions" . When IRS officially notifies taxpayers that a tax shelter is potentially abusive and therefore subject to disclosure requirements pursuant to Treas Regs 1.6011-4, the abusive tax shelter is a listed transaction (see Listed Transaction for complete description). Not all abusive tax shelters are listed transactions. |
| Abusive Tax Avoidance Transaction/Promotion | A specific tax transaction/promotion that reduces tax liability by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law (tax evasion). Abusive Tax Avoidance Transactions/Promotions may be applicable to either a large number of taxpayers or a limited number of taxpayers. These strategies may be organized and marketed and if so are often referred to as an Abusive Tax Shelter (see Abusive Tax Shelter for further description). |
| Emerging Issue | An issue, promotion, or device uncovered through normal examinations, media coverage, or other sources that may involve an abusive tax transaction or promotion. Such issues generally require additional investigation to determine the facts, applicable law, and scope to determine if abusive transactions/promotions exist. The investigation of emerging issues can be done by one Operating Division or by a cross-divisional group depending on projected taxpayer involvement and issue complexity. |
| Frivolous Tax Promotion/Scam | A transaction/promotion that is clearly unallowable or has no existing basis in law such as the Slavery Reparations Credit or IRC §861 Arguments (taxpayer claims that their income is not taxable or that withholding is not applicable). |
| Issue Champion | The Executive or Senior Management leader of an Issue Management Team chartered by one of the Operating Divisions or the SAT ESC. |
| Issue Management Team | A cross-divisional IRS Team chartered by the
Servicewide Abusive Transaction (SAT) Executive Steering Committee (ESC) to
develop a strategic response to an emerging abusive tax transaction/promotion
that involves either a highly technical transaction or a transaction/promotion
with widespread applicability. This Team reports to the SAT ESC. A team formed by one of the Operating Divisions to examine an emerging issue, which does not generally involve taxpayers from other Operating Divisions and/or is not a complex transaction requiring a Servicewide strategic response. |
| Listed Transaction | A transaction that IRS has officially notified
taxpayers as potentially abusive and therefore subject to the disclosure requirements
per Treas. Regs. 1.6011-4. Organizers, sellers and material advisors must
maintain and furnish certain investor information under Treas. Reg. 301.6112-1, Requirement to Prepare, Maintain and Furnish Lists with Respect to
Potentially Abusive Tax Shelters. Organizers, managers and sellers
(also referred to as "promoters"
) may be required to register
certain listed transactions under Temp. Treas. Reg. 301.6111-1T and Treas.
Reg. 301.6111-2.
Note:Per the American Jobs Creation Act of 2004 (Pub. L. No. 108–357), material advisors are no longer required to register tax shelters. Instead, material advisors must now disclose reportable transactions. |
| Office of the Senior Counsel to the Chief Counsel (OSC) | The office within Chief Counsel that evaluates emerging issues/transactions for determining if a transaction should be a "listed transaction." The OSC also hosts the monthly Emerging Issues Meeting. |
| Servicewide Abusive Transaction (SAT) Executive Steering Committee (ESC) | The executive group chartered to serve as a forum to develop cross-divisional IRS strategies for dealing with abusive transactions/promotions both internally and externally. The SAT ESC will ensure coordination of enforcement activities and resource issues to ensure a Servicewide perspective in combating abusive tax avoidance transactions/promotions. The SAT ESC reports to the Enforcement Committee. |
| Settlement Approach/Strategy | A Servicewide plan for combating a specific abusive
tax transaction/promotion. Options for settlement approaches/strategies include
using normal processes for case resolution or developing procedures for resolving
a specific issue that deviates from normal case resolution processes. Settlement
approaches/strategies are generally developed by an Issue Management Team,
or Operating Division Executive Leadership. Abusive tax transaction settlement approaches/strategies that deviate from normal case resolution processes must be reviewed by the SAT ESC and approved by the Enforcement Committee. |
| Tax Shelter | A tax strategy/promotion that " shelters" income from normal taxation. Depending on the facts and legal analysis, a specific transaction/promotion may represent either lawful tax avoidance or unlawful tax evasion. Those tax shelters resulting in tax evasion are known as Abusive Tax Shelters. The term "Tax Shelter" is sometimes used to mean "Abusive Tax Shelter" in common parlance. |
This document is intended for the sole use of the Issue Management Team in developing broad resolution strategies. Not for use in resolving individual taxpayer cases.
Purpose of any strategy should be to:
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Foster effective tax administration through overall impact on compliant and non-compliant taxpayers.
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Ensure fairness and consistency in administration of tax law.
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Maintain ethics and integrity in the decision making.
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Consider the impact on future compliance risks of penalty settlement.
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Focus on changing taxpayer behavior to foster voluntary compliance.
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Address the specific transaction or promotion.
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Tailor the strategy to address the egregiousness of the taxpayer actions/non-action.
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Facilitate resolution early in the process.
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Reduce associated burden on both the IRS and the taxpayer.
CRITERIA FOR DEVELOPMENT OF THE PENALTY RESOLUTION (including but not limited to)
While addressing possible resolution for the applicable penalty provisions the following criteria should be considered:
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Current law, policies and practices need to be followed. This would include code and regulations, IRM, Announcements (such as 2002-2), Circular 230 and Penalty Policy Statement 20-1.
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Categories of behavior demonstrated by investors may justify different treatment (see items below).
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Degree of transaction/promotion technical difficulty.
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Was the transaction/promotion marketed/promoted?
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Reporting versus concealment of the transaction may be considered (see items below).
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Sophistication of the taxpayer and their involvement in the investment decision.
POSSIBLE CATEGORIES OF BEHAVIOR DEMONSTRATED BY INVESTORS
1. It would be reasonable to treat investors who complied with disclosure requirements differently than those who did not disclose as part of a resolution strategy. Different treatment may be appropriate for those taxpayers who:
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Disclosed under Announcement 2002-2 where a penalty waiver is provided if the investor complied with the Announcement.
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Disclosed under IRC §6011 in a timely manner on first filed return (including amended return) as required per law.
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Newly listed transactions: If a transaction is listed after the filing of the tax return and before the end of the period of limitations for the final return (whether or not already filed) that reflects the tax consequences, tax strategy, or tax benefit described in the guidance listing the transaction, the taxpayer must disclose on the next return filed after the date the transaction is listed regardless of whether the taxpayer participated in the transaction in that year.
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Voluntarily disclosed non-listed transaction to Criminal Investigation under voluntary disclosure or by filing a corrected taxable amended return.
2. For investors who were required to disclose and did not comply: No waiver of the penalty would be generally proposed as part of a resolution strategy. The penalty issue would need to be developed in each case and reasonable cause addressed.
3. For investors who received fees from other investors (promoters/advisers) for activities related to the shelter: They would be excluded from any other general categories of penalty relief as part of a resolution strategy. The penalty issue would need to be developed in each case and reasonable cause addressed.
4. For investors who were not required to disclose: It may be appropriate to provide for no waiver of penalty as part of a resolution strategy. The penalty issue would need to be developed in each case and reasonable cause addressed.
5. Investor attempts to fully report or to conceal the transaction should be considered as part of a resolution strategy. Different actions may warrant different penalty considerations.
This document is intended for the sole use of the Issue Management Team in developing broad resolution strategies. Not for use in resolving individual taxpayer cases.
Purpose of any strategy should be to:
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Foster effective tax administration through overall impact on compliant and non-compliant taxpayers.
-
Ensure fairness and consistency in administration of tax law.
-
Maintain ethics and integrity in the decision making.
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Consider the impact on future compliance.
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Focus on changing taxpayer behavior to foster voluntary compliance.
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Address the need for definitive guidance for the specific transaction or promotion.
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Tailor the strategy to the transaction.
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Facilitate resolution early in the process.
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Reduce associated burden on both the IRS and the taxpayer.
CRITERIA FOR IDENTIFICATION AND DEVELOPMENT OF ISSUES IN CASES TO DESIGNATE FOR LITIGATION (including but not limited to)
While addressing whether selected issues in cases should be considered for designation for litigation as part of an overall tax shelter strategy the following criteria should be considered:
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If the shelter transaction includes a significant legal issue that affects a large number of taxpayers or has significant tax impact, consideration should be given to designation.
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If the shelter transaction is still being generally claimed or promoted, consideration should be given to designation. However, the fact that the shelter is no longer promoted or has been closed down by legislation or regulation does not mean that designation should not be considered. There may be a significant number of cases for prior years that need resolution if the legislation or regulation is prospective only. Consider, for example, the use of a resolution in the contingent liability transactions (see Rev. Proc. 2002-67, Settlement of Section 351 Contingent Liability Tax Shelter Cases.)
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If there is a need to establish judicial precedent due to a wide divergence between IRS and taxpayer viewpoints on the law, consideration should be given to designation. Designation and a court decision would promote ultimate resolution of the issue and conserve resources for both the government and taxpayers. An example of this is lease-in, lease-out transactions ("LILOs " ) described in Rev. Rul. 2002-69.
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If one or more aspects of the shelter transaction continue to be significant to other tax shelter transactions and have broader impact than the immediate shelter, e.g. issues surrounding application of IRC §351, Transfer to Corporation Controlled by Transferor, defeasance, or partnership basis, consideration should be given to designation. For example, the shelter may no longer be promoted or tax benefits from the shelter transaction may no longer be claimed by the taxpayer; however, transactions with similar structures or features may continue to be promoted or subsequent shelter transactions may utilize overstated tax basis from the prior shelter.
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Designation may not be necessary if cases with the same or similar issue are already docketed or scheduled for trial.
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Designation may not be necessary if the issue under examination is being conceded by many taxpayers during examination.
If a decision is made to select issues to designate for litigation, the following factors should be considered:
A. Several cases should be considered and developed for potential designation. Often, taxpayers may concede the issue or threaten to pay the tax and file a complaint for refund. If the taxpayer concedes the issue, the case should not be designated. A threat to pay the tax and file a complaint for refund should not alter the decision to designate. If a taxpayer pays the tax and files a complaint for a refund after the case is designated, the Department of Justice will be apprised of the designation and take it into consideration when handling the case.
B. The issue in the case recommended for litigation should result in a decision that will impact the other cases with similar transactions. Thus, cases should be selected with fact patterns that are fairly representative of the cases involved in the shelter strategy.
C. Designated issues in cases must be developed and resources must be committed for their complete development. When an issue in a case is identified as a potential for designation and the development of the issue is underway, a commitment must be made to follow through on the process unless the recommendation for designation is determined to be no longer appropriate. Compliance must commit its resources to the complete development of the issues, including but not limited to:
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Hiring of outside experts including appraisers, economists, etc.
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Transcribed interviews for key parties
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Summonses of necessary taxpayer and third party documents and enforcement if necessary
D. The process of designating an issue in a case is generally lengthy. The procedures for designating a case for litigation are set forth in the Chief Counsel’s Directive Manual 33.6.4, Designating a Case for Litigation. In addition, once a case is before the court, the time frame for an ultimate decision is uncertain and may be lengthy.
E. Full development of the penalty should be completed and the penalty analysis and decision made part of the case designation process. Designation of non-penalty issues in a case does not necessarily mean the penalty should be designated. The penalty must separately meet the criteria for designation.
F. The effect of the statute of limitations on case development and the designation process must be considered. For example, there must be sufficient time to fully develop the case including making the recommendation and securing approval for designation.
G. The overall impact on the particular taxpayer must be considered, for example, if the taxpayer has carry backs, carryovers, or credits that eliminate or significantly reduce the tax deficiency, possibly making the case a poor recommendation to designate for litigation.
H. The positions that may have been taken on the same or a similar issue for the particular taxpayer that may affect an overall view of the case must be considered, for example, whether the issue was examined and no adjustment made on a prior examination.
I. If a decision is made to designate an issue in a case, a statutory notice is issued, rather than a 30-Day letter, and all unagreed issues are included in the statutory notice. If the case is petitioned to the Tax Court, some of the unagreed issues may go to Appeals.
This document is intended for the sole use of the Issue Management Team in developing broad resolution strategies. Not for use in resolving individual taxpayer cases.
Purpose of any strategy should be to:
-
Foster effective tax administration through overall impact on compliant and non-compliant taxpayers.
-
Ensure fairness and consistency in administration of tax law.
-
Maintain ethics and integrity in the decision making.
-
Consider the impact on future compliance.
-
Focus on changing taxpayer behavior to foster compliance.
-
Address the specific transaction or promotion.
-
Tailor the strategy to the types of transaction costs incurred.
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Facilitate resolution early in the process.
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Reduce associated burden on both the IRS and the taxpayer.
Transaction costs may include fees to promoters, to accommodating parties, fees for document preparation, actual losses incurred that are associated with the transaction (true economic losses), for legal advice, for valuations or appraisals, interest expense and similar types of expenses. These transaction costs are sometimes referred to as the "out of pocket costs. " As a legal matter, rarely would taxpayers be entitled to out of pocket costs where a transaction is a sham in fact or lacks economic substance because such transactions generally do not give rise to valid deductions or losses.
CRITERIA FOR DEVELOPMENT OF THE TREATMENT AND CONSIDERATION OF THE TRANSACTION COSTS (including but not limited to)
While addressing whether transaction costs should be considered in any resolution the following criteria should be considered:
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Where the legal theory for disallowance is that the transaction was a sham in fact or sham in substance (lacks business purpose and economic substance) and did not give rise to valid deductions or losses, there is a strong indication that transaction costs should not be allowed.
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Where the legal theory is primarily based on a technical argument, there is an indication that transaction costs may be allowed.
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Where the only legal theory is based on a technical argument, there is a strong indication that transaction costs may be allowed.
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Where a specific transaction cost was attributable to a separate economically substantive element that was not the centerpiece of the underlying sham transaction (for example, an interest deduction that was related to a loan that was part of the transaction), there is an indication that the costs associated with the loan may be allowed.
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Consider disallowing transaction costs that are an integral part of the purported benefits of the transaction. For example, if the taxpayer generates interest deductions by entering into an abusive repurchase agreement which results in payment of more interest than interest received, the payments made by the taxpayer should not be permitted as an allowable deduction because the payments constitute the principal tax benefits of the transaction. See, e.g., United States v. Wexler, 31 F. 3d 117 (3rd Cir. 1994).
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Whether the transaction costs cannot be readily determined and, therefore, allowance will result in disparate treatment among taxpayers, should be considered.
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Whether the transaction costs are paid to an external party for the majority of the investors or whether the transaction was developed by the taxpayer and the transaction costs were not paid to external parties (equitable treatment and resources to develop the amount of the transaction costs), should be considered.
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Whether all transaction costs or only specific transaction costs should be allowed or not allowed, should be considered.
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How the transactions costs should be allowed should be considered. For example, should the costs (or a portion or specific costs) be part of a basis determination?