by Roger Russell
For the first time, the Internal Revenue Service has teamed up with state tax officials in a nationwide partnership to combat abusive tax shelters. Under agreements with individual states, the IRS will share information on abusive tax avoidance transactions and the taxpayers who participate in them.
The agreements creating this partnership are designed to enable both states and the federal government to move more aggressively in the fight to ensure that all taxpayers pay their fair share. Forty states and the District of Columbia joined the IRS in announcing the signing of the agreements.
“This agreement marks a milestone in state and federal cooperation,” said IRS Commissioner Mark W. Everson. “From today forward, we will work together in combating abusive tax schemes. We will share information and coordinate case management. This agreement effectively extends the resources of the IRS and the states.”
The move comes in the wake of alleged tax shelter abuses by several Big Four and national CPA firms, as well as increasing concern about abuses by smaller, fly-by-night promoters.
Under the partnership, the IRS will exchange information about abusive tax avoidance transaction leads with participating states. This will allow the IRS and state agencies to avoid duplication and to piggyback on each other’s work. The states and the IRS will then share information on any resulting tax adjustments, reducing the need for duplicating lengthy taxpayer examinations by both individual states and the IRS.
“The states and the IRS share a common goal to dry up abusive schemes,” said Stephen M. Cordi, president of the Federation of Tax Administrators and deputy comptroller of Maryland. Cordi observed that the partnership takes federal-state cooperation “to a new level beyond simply sharing data and joint customer service projects, to real compliance.”
“Taxpayers not complying with federal laws are most certainly not complying with state laws,” he said. “We hope to recover unpaid state taxes but, more important, if we don’t partner with the IRS to confront abusive tax schemes, we lose the trust of our compliant taxpayers, and that’s a big deal.”
The Federation of Tax Administrators represents all state tax agencies in the 50 states, the District of Columbia and New York City.
Representatives from California, Louisiana, Maryland, Massachusetts, New Jersey, New York, Virginia and the District of Columbia joined with Everson in announcing the initiative.
The additional 33 states that signed the partnership agreement include: Alabama, Arizona, Arkansas, Connecticut, Georgia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia and Wisconsin.
Although that leaves 10 states not participating, more are expected to sign on in the weeks ahead, according to the IRS.
A major incentive to partner with the IRS is the declining revenue that many states are facing. South Carolina Department of Revenue director Burnett Maybank III noted that a recent study estimated that his state loses more than $80 million in revenue each year from tax shelters. “That is especially critical when the state desperately needs every legitimate revenue dollar,” he said.
The Abusive Tax Avoidance Transactions Memorandum of Understanding was negotiated over the past year between individual states and the IRS as a joint effort. Representatives of the IRS Small Business/Self-Employed Division, the FTA and several state tax agencies participated.
SB/SE commissioner Dale Hart noted that a major change resulting from the agreement is the exchange of information around identified schemes and transactions. “This will allow us to leverage and focus our limited resources and reduce duplication of efforts,” he said. “This is a different approach from many of our past partnerships, where we have not always taken such a collaborative approach in dealing with compliance challenges common to both the IRS and the states.”
A key component of the agreement, said Hart, is the sharing of leads for possible examination by the states. “This approach will leverage our ability to identify those involved in these schemes, and take appropriate actions to bring these individuals into compliance.”
The IRS and states will also partner in outreach and education efforts, Hart said. “We recognize that in teaming together with the states in our counter-marketing efforts, we can reach the maximum audience and perhaps prevent others from being lured into these schemes and scams.”
The ATAT Memorandum of Understanding focuses solely on abusive tax avoidance transactions. The agreement leaves procedures governing communication on more routine taxpayer compliance efforts unchanged, according to the IRS. This maintains the separation of federal and state tax authority and the protection of taxpayer privacy.
“We treat taxpayer privacy as a top priority,” said Everson. “The information shared under this agreement will be strictly limited to that pertaining to abusive transactions.”
In addition to greater cooperation in sharing leads in the area of abusive tax transactions, the partnership with the states includes joint outreach activities to the public to more effectively counter the claims of those marketing tax avoidance schemes.
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