by Roger Russell

The Internal Revenue Service is taking a closer look at tax shelters.

Professional tax preparers’ role in helping clients enter tax shelters was among several shelter issues raised during a meeting involving officials from the IRS and several groups representing professional tax preparers, including the American Institute of CPAs.

Recently, the IRS took enforcement action against KPMG and BDO Seidman to compel them to disclose their tax shelter deals and client lists. A federal judge has already ruled in favor of the IRS in the case involving BDO Seidman. A ruling on the KPMG case is expected later this year.

"Tax practitioners serve as advisors to clients on avoiding overpaying Uncle Sam," said discussion moderator Lew Witmer, the IRS’s former director of internal communications. "But the facts and the law must support any advice you give. That’s why this discussion about tax shelters is so important."

Panelists discussed a recent settlement offer by the IRS for three types of tax shelters. Taxpayers involved in these shelters will have limited times to accept IRS offers to resolve their tax issues. After the settlement periods end, according to the IRS, it will pursue the remaining cases through its usual enforcement processes, including litigation.

"What we’re trying to achieve is transparency," said Treasury assistant secretary for tax policy Pam Olson. "We’re working to have a comprehensive approach to tax shelters - to identify them, to have them considered in examination, and in appropriate cases to consider a penalty."

"The Treasury and the IRS are committed to stopping abusive tax avoidance transactions," she said on the release of the settlement provisions. "These transactions undermine the fairness of our tax system and impose a tremendous burden on the resources of the IRS. It is critically important that the IRS act to resolve promptly as many of these issues as possible."

The settlement initiative, announced earlier this month,

requires taxpayers to pay significant amounts of tax, plus interest. The IRS described the settlement as a win-win proposition for the government and taxpayers, since both will avoid expensive litigation on the issues. The specific settlements depend on the merits of each transaction and each case. The IRS said it would also consider whether penalties should apply where taxpayers did not previously disclose their abusive transactions.

"This effort is a way to resolve cases without months or years of costly litigation while making it clear to taxpayers who may consider participating in abusive tax shelters in the future that they will end up in a bad deal," said Commissioner Charles O. Rossotti when the settlement initiative was announced. "It is not smart business to rely on the claims of promoters who stand to gain fees by selling these deals."

The IRS identified two of the shelters - the Section 302/318 basis shifting shelter and the Section 351 contingent liability shelter - as tax avoidance transactions in notices issued last year. Taxpayers in the basis shifting transaction will have until Dec. 3, 2002, to notify the IRS of their decision to participate in the settlement initiative. Those in the contingent liability transaction will have until Jan. 2, 2003, to apply for resolution of their tax liability under one of two settlement processes.

A third shelter - corporate-owned life insurance (COLI) - has been found to be abusive by the courts. Since August 2001, the IRS has offered COLI taxpayers a settlement in which they retain 20 percent of the claimed benefits. This offer is being discontinued. Taxpayers will receive letters giving them 45 days to accept the offer before it ends. Taxpayers who want to accept this offer but who do not receive a letter by Oct. 19 should contact the IRS by Nov. 18, 2002.

Olson said that the basis shifting shelters include a high percentage of individuals as well as corporations. Resolution of the contingent liability transactions includes an option for a baseball-style arbitration procedure.

"It involves the option to take a fixed amount or go into a Ôrange’ settlement for additional examination," she said. "If they can’t resolve the issue within the range, each side puts its best offer on the table, and the arbitrator will choose which offer better represents the merits of the case."

According to David B. Robison, IRS national chief of the Office of Appeals, the parameters were set based on an assessment of the hazards of litigation. "Taxpayers who do not avail themselves of these settlement initiatives should not expect a later administrative resolution of their case that is more advantageous. Appeals’ position on each issue will quickly adjust to any litigation developments in the area."

Larry Langdon, commissioner of the Large and Mid-Size Business Division, said the IRS is increasingly receiving disclosures of new transactions "that require reasonably prompt action, and that’s where we need to be tightly linked with people at the Chief Counsel’s Office, Treasury, and Appeals, so that in effect the service speaks with one voice - in discovering these transactions, issuing notices and coming up with resolution techniques that work."

According to Olson, the recent settlement offers are just the beginning. "There are a lot of other tax shelter transactions out there. We will continue to identify issues that need to be addressed by the IRS and develop settlement options. There’s another notice being drafted now on a reinsurance transaction. It’s really important that we move forward as quickly as we can with plans for resolving the issues."

Langdon agreed. "One of the lessons we learned from the 1980s is that we did not move quickly enough, we did not move concretely enough with regard to taking into account hazards of litigation. That’s where our colleagues in Appeals are very helpful in giving us settlement options that take into account the hazards of litigation. We think the settlement options are very wise, very appropriate and very timely."

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