Tax Shelter Settlements Had Little Impact

The Internal Revenue Service’s program for allowing “Son of Boss” tax shelter investors to settle their tax disputes often did not lead to greater taxpayer compliance, according to a new report.

The report by the Treasury's Inspector General for Tax Administration found that the Son of Boss settlement initiative provided participating taxpayers and the IRS with the opportunity to save time and money that might otherwise have been spent on a protracted dispute. However, an evaluation of voluntary filing and payment compliance in the three years following the settlement’s announcement in 2004 showed that 27 percent, or 300, of the 1,103 taxpayers who participated in the Son of Boss settlement did not meet their tax return filing and payment obligations at some point in this period.

TIGTA compared the filing and payment compliance of participants in the Son of Boss settlement program to the compliance of taxpayers participating in the IRS’s offer-in-compromise program. TIGTA found in 2004 that 96 percent of the 84 taxpayers evaluated in a statistical sample of 28,018 OICs were in compliance with their filing and payment obligations at the time of review.

The prospect of losing benefits seems to contribute to a high level of voluntary filing and payment compliance, which is key to reducing the annual tax gap. Taxpayers participating in an OIC face losing the benefits they received because the IRS can reinstate the debt and resume collection actions if they fail to meet all their filing and payment obligations in the succeeding five years. In contrast, taxpayers participating in the Son of Boss settlement were not required to make a similar commitment as a condition for keeping the settlement’s benefits.