I have read thousands of revenue rulings, revenue procedures, letter rulings, announcements, and other IRS pronouncements over the last 30 years or so and I now have a new favorite. It simply defies belief!
The IRS announced last week that 1,165 taxpayers participating in its Son of Boss tax shelter settlement program have paid to it more than $3.2 billion. These taxpayers conceded 100 percent of the claimed tax losses and, in addition, paid a penalty of either 10 percent or 20 percent if they hadn't previously disclosed the transactions to the IRS. The typical payment was almost $1 million, with 18 taxpayers paying more than $20 million each and one writing a check for over $100 million.
It is estimated that two-thirds of Son of Boss participants have settled. The other one-third will shortly receive a deficiency notice from the IRS disallowing all claimed tax losses and transaction costs. They will also be assessed the maximum possible 40 percent penalty.
I believe the crackdown against these types of tax shelters was inevitable as the promoters and investors of tax shelters simply just got too greedy. The tax advisors creating these tax shelters took tax planning into a fantasyland and some wealthy individuals were captivated by what they were shown and willing to pay hefty fees to enter that so-called "reality' world.
Following the Enron and WorldCom debacles, commentators predicted that tax shelters would come under attack. It is now occurring in earnest, and in this post-Enron and WorldCom world, where the accounting and auditing landscape has changed substantially, I expect that we will see much more with regard to tax shelters.
For example, as you read this, the IRS is asking taxpayers that took part in a stock option tax shelter to settle their tax liability. Soon, the IRS and disgruntled investors will most likely go after the advisors on abusive tax shelters, which also mirrors what the SEC and investors in WorldCom and Enron have been doing via enforcement actions and lawsuits against WorldCom and Enron's advisors.
It will be interesting to see if, as with Sarbanes-Oxley, there will be a fallout for CPAs and others that had no direct connections with the tax shelters currently under attack by the IRS.
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