A crackdown on abusive tax shelters that includes codifying the economic substance doctrine would create legal booby traps for small businesses and open the door for new abuses by unscrupulous tax shelter promoters, the American Institute of CPAs warned Congress.
In comments submitted to the Senate Permanent Subcommittee on Investigations, the AICPA raised concerns that new statutory language specifically outlawing transactions with no economic purpose other than tax benefits "would have a long-term negative effect on both taxpayers and the government."
Worse still, codification of the murky judicial doctrine of economic substance could backfire by making it easier to design abusive shelters that skirt the rules, AICPA Tax Executive Committee chair Thomas J. Purcell, III warned.
"As past experience with abusive tax shelters shows, fixed rules are often easy to avoid and can lead to new abuses," Purcell said.
The Senate subcommittee called for an expansion of the economic substance doctrine in a report issued earlier this year that fingered several of the nation's largest CPA firms as major promoters of abusive tax shelters.
To curb abusive shelter activity, the subcommittee recommended a number of steps, including new federal legislation "to clarify and strengthen the economic substance doctrine and to strengthen civil penalties on transactions with no economic substance or business purpose apart from their alleged tax benefits."
The AICPA's comments raised no objections to other measures to curb shelter activity recommended in the Senate report, including new Public Company Accounting Oversight Board rules restricting accounting firms from providing "aggressive tax services" to their audit clients.
Purcell praised the subcommittee report for contributing "to the transparent discussion of tax system abuse," and stressed that the AICPA is cooperating with the Internal Revenue Service in an effort to "eradicate" abusive tax shelters.
But the AICPA made it clear that the profession's cooperation will stop short of supporting the subcommittee's plan to codify the economic substance doctrine.
Calling that proposal "counterproductive," Purcell warned that codifying the economic substance doctrine "would deprive the tax system of the flexibility needed to keep pace with the changing economic environment," and open the door for new "statutory complexity," and create "traps for small businesses and a broad cross section of taxpayers."
The institute isn't alone in raising objections to an expansion of the economic substance doctrine. Other groups, including the Financial Services Roundtable and the Tax Executives Institute have also raised objections to the plan, and IRS officials themselves have expressed concerns.IRS Chief Counsel Donald L. Korb, for one, has called for limiting the use of the economic substance doctrine to address tax shelter issues, arguing that it would be an inappropriate tool in all but a "distinct minority" of cases.
