Abusive Tax Avoidance Transactions
IRS Needs Better Data to Inform Decisions about Transactions Gao ID: GAO-11-493 May 12, 2011Abusive tax avoidance transactions (ATAT) range from frivolous tax schemes to highly technical and abusive tax shelters marketed to taxpayers by promoters selling tax advice. ATATs threaten the U.S. tax system's integrity if honest taxpayers believe that others do not pay their fair share of taxes. GAO was asked to (1) describe what is known about trends in ATAT usage; (2) describe results of IRS's ATAT enforcement efforts; and (3) evaluate IRS's implementation of the ATAT provisions in the American Jobs Creation Act of 2004. Using criteria from the act, GAO analyzed statistics and other documents on trends and results and interviewed IRS and other tax experts.
While trend data on taxpayers' use of ATATs are limited, IRS and other experts GAO contacted agreed that a problem exists and is continually changing. One theme that emerged from GAO's discussions with these experts is that ATATs marketed by promoters to corporations and wealthy individuals have declined in recent years, although the experts had different views on the extent of the decline. They also said that ATATs have become more international in nature. Even though estimating the extent of the ATAT problem is inexact because ATATs are often hidden, the experts believed that the changing nature of ATATs warrants continuous IRS vigilance. IRS has many ATAT-related enforcement efforts--investigations, examinations, and settlement initiatives--across different divisions but has incomplete data on the results on those efforts. For example, IRS's small business division's promoter investigations help stop promotions, but IRS had incomplete information on why investigations often closed without penalties or injunctions, information that could be used to help decide the types of investigations to start. In addition, IRS recommended billions of dollars in additional taxes from examining tax returns with suspected ATATs, but IRS did not identify the part of the additional amount that was collected or that related to the ATAT issue as opposed to other issues. In addition, some ATAT results were reported inconsistently across IRS divisions. Without comprehensive or consistent information, IRS does not have the best information to decide which promoters to investigate and the number of examinations that should be done as well as to evaluate their impacts. Even though the 2004 act increased the requirements for taxpayers and promoters to disclose their use of transactions and enhanced the penalties for improper disclosure, problems existed. IRS received many disclosures of transaction use from taxpayers, but it had no assurance that its Office of Tax Shelter Analysis received all the disclosures it should have. In addition, IRS did not verify that all the disclosures it received were complete, and a new process for reviewing the completeness of disclosures and following up with taxpayers was not yet finalized. Not receiving disclosures or receiving incomplete disclosures of transactions would keep IRS from having information needed to identify the transactions that merit an examination of their appropriateness and to assess related penalties as needed. Finally, certain promoters who are required by law under threat of penalty to give their list of investors within 20 business days after IRS requested it did so. However, other promoters who are not covered by this requirement often took longer than 20 days to provide the lists without the threat of a similar penalty. IRS did not comprehensively track how quickly the lists were received. Not receiving lists on a timely basis prevents IRS from quickly working to stop promoter activity. GAO suggests that Congress consider instituting a penalty aimed at certain promoters not giving investor lists to IRS within a specified time. GAO also recommends IRS act or establish processes to (1) improve data on the results of ATAT-related investigations and examinations, (2) ensure that required disclosures are filed by taxpayers, (3) review disclosures for completeness; (4) track the time for IRS to receive investor lists; and (5) induce more promoters to provide investor lists by a specified time. In commenting on a draft of this report, IRS agreed with most recommendations but cited resource and capability constraints in tracking ATAT data and investor lists, which GAO believes can be addressed.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: James R. White Team: Government Accountability Office: Strategic Issues Phone: (202) 512-5594GAO-11-493, Abusive Tax Avoidance Transactions: IRS Needs Better Data to Inform Decisions about Transactions
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
May 2011:
Abusive Tax Avoidance Transactions:
IRS Needs Better Data to Inform Decisions about Transactions:
GAO-11-493:
GAO Highlights:
Highlights of GAO-11-493, a report to congressional requesters.
Why GAO Did This Study:
Abusive tax avoidance transactions (ATAT) range from frivolous tax
schemes to highly technical and abusive tax shelters marketed to
taxpayers by promoters selling tax advice. ATATs threaten the U.S. tax
system‘s integrity if honest taxpayers believe that others do not pay
their fair share of taxes.
GAO was asked to (1) describe what is known about trends in ATAT
usage; (2) describe results of IRS‘s ATAT enforcement efforts; and (3)
evaluate IRS‘s implementation of the ATAT provisions in the American
Jobs Creation Act of 2004. Using criteria from the act, GAO analyzed
statistics and other documents on trends and results and interviewed
IRS and other tax experts.
What GAO Found:
While trend data on taxpayers‘ use of ATATs are limited, IRS and other
experts GAO contacted agreed that a problem exists and is continually
changing. One theme that emerged from GAO‘s discussions with these
experts is that ATATs marketed by promoters to corporations and
wealthy individuals have declined in recent years, although the
experts had different views on the extent of the decline. They also
said that ATATs have become more international in nature. Even though
estimating the extent of the ATAT problem is inexact because ATATs are
often hidden, the experts believed that the changing nature of ATATs
warrants continuous IRS vigilance.
IRS has many ATAT-related enforcement efforts-”investigations,
examinations, and settlement initiatives”-across different divisions
but has incomplete data on the results on those efforts. For example,
IRS‘s small business division‘s promoter investigations help stop
promotions, but IRS had incomplete information on why investigations
often closed without penalties or injunctions, information that could
be used to help decide the types of investigations to start. In
addition, IRS recommended billions of dollars in additional taxes from
examining tax returns with suspected ATATs, but IRS did not identify
the part of the additional amount that was collected or that related
to the ATAT issue as opposed to other issues. In addition, some ATAT
results were reported inconsistently across IRS divisions. Without
comprehensive or consistent information, IRS does not have the best
information to decide which promoters to investigate and the number of
examinations that should be done as well as to evaluate their impacts.
Even though the 2004 act increased the requirements for taxpayers and
promoters to disclose their use of transactions and enhanced the
penalties for improper disclosure, problems existed. IRS received many
disclosures of transaction use from taxpayers, but it had no assurance
that its Office of Tax Shelter Analysis received all the disclosures
it should have. In addition, IRS did not verify that all the
disclosures it received were complete, and a new process for reviewing
the completeness of disclosures and following up with taxpayers was
not yet finalized. Not receiving disclosures or receiving incomplete
disclosures of transactions would keep IRS from having information
needed to identify the transactions that merit an examination of their
appropriateness and to assess related penalties as needed. Finally,
certain promoters who are required by law under threat of penalty to
give their list of investors within 20 business days after IRS
requested it did so. However, other promoters who are not covered by
this requirement often took longer than 20 days to provide the lists
without the threat of a similar penalty. IRS did not comprehensively
track how quickly the lists were received. Not receiving lists on a
timely basis prevents IRS from quickly working to stop promoter
activity.
What GAO Recommends:
GAO suggests that Congress consider instituting a penalty aimed at
certain promoters not giving investor lists to IRS within a specified
time. GAO also recommends IRS act or establish processes to (1)
improve data on the results of ATAT-related investigations and
examinations, (2) ensure that required disclosures are filed by
taxpayers, (3) review disclosures for completeness; (4) track the time
for IRS to receive investor lists; and (5) induce more promoters to
provide investor lists by a specified time.
In commenting on a draft of this report, IRS agreed with most
recommendations but cited resource and capability constraints in
tracking ATAT data and investor lists, which GAO believes can be
addressed.
View [hyperlink, http://www.gao.gov/products/GAO-11-493] or key
components. For more information, contact James R. White at (202) 512-
9110 or whitej@gao.gov.
[End of section]
Contents:
Letter:
Background:
IRS Has Limited Trend Data on the Extent of Abusive Transactions, but
Many Tax Experts Said That the Ever-Changing Nature of ATATs Requires
Constant Vigilance:
IRS Shows Vigilance over ATATs in Its Enforcement Efforts, but
Quantifying the Impact of the Efforts Is Difficult:
The AJCA Increased Abusive Transaction Disclosure Requirements and
Penalties, but Problems Remained:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Additional Details about Scope and Methodology:
Results of the Internal Revenue Service's (IRS) Promoter
Investigations, Investor Examinations, and Settlement Initiatives:
Results of IRS's Implementation of the Abusive Tax Avoidance
Transaction (ATAT) Disclosure and Sanction Provisions Enacted in the
American Jobs Creation Act of 2004 (AJCA):
Reliability of Data from IRS Databases That We Used:
Appendix II: Selected American Jobs Creation Act of 2004 Provisions
Related to Tax Shelters:
IRC Section 6111--Disclosure of Reportable Transactions by Material
Advisors:
IRC Section 6112--Investor Lists:
IRC Section 6501(c)(10)--Statute of Limitations for Undisclosed Listed
Transactions:
IRC Section 6662A--Accuracy-Related Penalty:
IRC Section 6700--Penalty on Promoters of Abusive Tax Shelters:
IRC Section 6707--Penalty for Failing to Furnish Information Regarding
Reportable Transactions:
IRC Section 6707A--Penalty for Failure to Disclose Reportable
Transactions:
IRC Section 6708--Failure to Maintain Investor Lists:
IRC Section 7408--Enjoin Specified Conduct:
Title 31, Section 330--Practice before the Department of the Treasury:
Title 31, Section 5321--Penalty on Failure to Report Interest in
Foreign Financial Accounts:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: SB/SE Closed Promoter Investigation Results, Fiscal Years
2006 through 2010:
Table 2: Number of Form 8886 Reportable Transaction Disclosures by
Taxpayers, Calendar Years 2007 through 2009:
Table 3: Form 8918 and Form 8264 Filings, Calendar Years 2003 through
2009:
Table 4: Number of Investor Lists Requested from Review of Material
Advisor Disclosures, Calendar Years 2006 through 2009:
Table 5: Accuracy-Related Penalty Assessments for Reportable
Transactions, Fiscal Years 2005 through 2009:
Table 6: Penalty Assessments on Promoters, Fiscal Years 2004 through
2009:
Table 7: Penalty Assessments on Material Advisors for Failure to
Disclose Reportable Transactions, Fiscal Years 2005 through 2009:
Table 8: Penalty Assessments on Taxpayers for Failure to Disclose
Reportable Transactions, Fiscal Years 2005 through 2009:
Table 9: Penalty Assessments on Material Advisors for Failure to
Maintain Investor Lists, Fiscal Years 2005 through 2009:
Table 10: Number of Injunctions, Fiscal Years 2003 through 2009:
Table 11: Number of Censures, Fiscal Years 2003 through 2009:
Table 12: Penalty Assessments for Failure to Report Interest in
Foreign Financial Accounts, Calendar Years 2003 through 2009:
Figures:
Figure 1: Comparison of Reportable and Non-reportable Abusive
Transactions:
Figure 2: IRS Organizational Units and Coordinating Efforts for ATATs:
Figure 3: Cumulative Number of Transactions Listed by IRS, Calendar
Years 2000 through 2010:
Figure 4: IRC Section 6700 Penalty Assessments on Promoters of Tax
Shelters, Fiscal Years 2004 through 2009:
Figure 5: Number and Dollar Amount of Penalty Assessments for Not
Adequately Disclosing Reportable Transactions against Taxpayers under
Section 6707A and Material Advisors under Section 6707, Fiscal Years
2005 through 2009:
Abbreviations:
A-CIS: Audit Information Management-Computer Information System:
AJCA: American Jobs Creation Act of 2004:
ATAT: abusive tax avoidance transaction:
ERIS: Enforcement Revenue Information System:
IRC: Internal Revenue Code:
IRS: Internal Revenue Service:
LB&I: Large Business and International division:
LDC: Lead Development Center:
LILO: Lease-In/Lease-Out:
LMSB: Large and Mid-Size Business division:
OPR: Office of Professional Responsibility:
OTSA: Office of Tax Shelter Analysis:
SB/SE: Small Business/Self-Employed division:
SILO: Sale-In/Lease-Out:
SOI: Statistics of Income:
TOI: transaction of interest:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 12, 2011:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin G. Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Charles Grassley:
Ranking Member:
Committee on the Judiciary:
United States Senate:
Abusive tax avoidance transactions (ATAT) range from tax schemes based
on clearly frivolous arguments to highly technical and abusive tax
shelters engineered and marketed by firms. As characterized by the
Internal Revenue Service (IRS), ATATs take a tax position that is not
supported by tax law or manipulate the law in a way that is not
consistent with the law's intent. Promoters (including material
advisors) may encourage the use of these abusive transactions by their
customers.[Footnote 1] In 2003, we reported that IRS officials
estimated that several hundred thousand participants were likely
engaged in abusive tax avoidance schemes.[Footnote 2] In addition, we
reported that IRS data sources, all with limitations, suggested that
abusive tax shelters totaled tens of billions of dollars of potential
tax losses over about a decade.[Footnote 3] ATATs threaten our tax
system's integrity and fairness if honest taxpayers believe that
significant numbers of individuals and businesses are not paying their
fair share of taxes.
Since our 2003 work, the American Jobs Creation Act of 2004 (AJCA)
addressed ATATs through disclosure and penalty provisions.[Footnote 4]
Interested in the act's effectiveness, you asked us to report on IRS's
efforts to address it. The objectives of this report are to:
* describe what IRS and other experts know about trends in the use of
ATATs;
* describe the results that IRS's promoter investigations, investor
examinations, and settlement initiatives have achieved;[Footnote 5]
and:
* evaluate the results of IRS's implementation of the ATAT disclosure
and sanction provisions enacted in the AJCA.
To address these objectives, we did the following (see appendix I for
details about our scope and methodology):
* reviewed IRS's documentation on ATAT trends, including its most
recent report on the size of the ATAT problem,[Footnote 6] and
interviewed IRS officials and outside tax experts--former high-level
IRS officials and their suggested contacts--about these ATAT trends
and whether the nature of ATAT problems changed in sophistication or
scope in recent years;
* analyzed IRS investigation, examination, and settlement initiative
statistics, focusing on two IRS divisions that pursue abusive
promoters and that our 2003 work highlighted--the Large Business and
International (LB&I) division[Footnote 7] and the Small Business/Self-
Employed (SB/SE) division, and interviewed IRS officials about why IRS
did certain investigations and examinations and not others; and:
* using criteria inherent in the AJCA, evaluated (1) ATAT disclosures
to IRS and their level of completeness, (2) IRS's requests for the
lists of investors in ATATs from tax advisors, and (3) ATAT penalties
and other sanctions used since 2004, and interviewed IRS officials on
why some disclosures were required to be sent to two places in IRS and
how well that requirement worked.
We conducted this performance audit from July 2009 through May 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
If ATATs are highly technical and organized or marketed, they are
often referred to as abusive tax shelters. According to IRS, abusive
tax shelters result in unlawful tax evasion. Our report on business
network-based tax evasion illustrates how one type of evasive
transaction--the installment sale bogus optional basis--operated.
[Footnote 8] ATATs also include abusive transactions that are
considered scams or schemes based on the erroneous application of tax
law or clearly frivolous arguments.
Tax shelters can be legitimate to the extent that they take advantage
of various provisions in the tax code to lawfully avoid tax. For
instance, retirement plans (e.g., 401(k)) shelter income by not
subjecting certain wages to federal income taxes until the wages are
distributed from the plan. Tax shelters can feature such techniques as
taxpayers trying to avoid gains altogether or to convert ordinary
income into capital gains to take advantage of lower tax rates on
capital gains.
A difficulty arises when tax shelters are designed to confer a tax
benefit that the Congress did not intend. An example of this type of
shelter is the lease-in, lease-out (LILO) shelter that involved
complex purported leasing arrangements in which corporations
supposedly leased large assets, such as sewer systems, from owners
without a tax liability and immediately leased them back to their
original owners in an attempt to delay income recognition for tax
purposes for many years.
ATATs have been a long-standing problem that the Congress, Treasury,
and IRS have used different methods to address. For example, the Tax
Reform Act of 1986 addressed tax shelters from the 1970s and 1980s by
preventing individual taxpayers from using "passive activity" losses
from tax shelter investments to reduce taxes by offsetting taxable
income.[Footnote 9]
Interest in abusive tax shelters picked up again in the 1990s. In
1999, a Department of the Treasury report described a large and
growing problem with abusive corporate tax shelters. In 2002, citing
many ongoing efforts, Treasury published a plan to further combat
ATATs, featuring both legislative proposals and administrative
actions. In 2004, the AJCA provided updated disclosure and list-
maintenance rules and updated penalty provisions. The list-maintenance
rules require that material advisors keep lists of their investors and
make the lists available to the Secretary of the Treasury within 20
business days of a request.[Footnote 10] For a summary of selected
provisions of the AJCA related to ATATs, see appendix II.
Over time, Treasury's strategy for addressing tax shelters centered on
rules that were intended to reinforce each other. The rules attempted
to do this by requiring taxpayers entering into certain transactions
and tax advisors recommending the transactions to disclose to IRS
information about the same transactions. The idea was that using these
rules, IRS could follow a transaction from a taxpayer to the
taxpayer's advisor and from the advisor to any of the advisor's
clients.
The rules require specified taxpayers to disclose "reportable
transactions."[Footnote 11] These transactions include "listed
transactions" that are the same or substantially similar to one of the
types of transactions that IRS has determined to be a tax avoidance
transaction and identified by notice, regulation or other published
guidance. Reportable transactions also include "non-listed"
transactions, which are not designated as tax avoidance transactions
but prompt tax avoidance or evasion concerns nonetheless. Non-listed
reportable transactions include certain transactions (1) offered to a
taxpayer under conditions of confidentiality and for which the
taxpayer paid an advisor a minimum fee and (2) certain loss
transactions. Non-reportable abusive transactions are abusive
transactions not described in one of the reportable categories. For a
comparison of requirements for reportable and non-reportable
transactions and a description of how taxpayers, material advisors and
other promoters, and IRS interact with each other, see figure 1.
Figure 1: Comparison of Reportable and Non-reportable Abusive
Transactions:
[Refer to PDF for image: illustration]
Reportable transactions:
1) Taxpayer participates in a reportable transaction. Go to #2.
1A) Advisor makes a tax statement regarding a reportable transaction.
Taxpayer enters into the transaction. Advisor receives or expects to
receive at least the minimum fee. Go to #3A.
2) Required to file Report able Transaction Disclosure Statement (Form
8886). Go to #3 and #3A.
3) Required to file form with tax return each year taxpayer
participates in the transaction. Go to #4.
3A) Required to send form to the Office of Tax Shelter Analysis.
Taxpayers only send Form 8886 in the initial year of filing. Go to #4.
4) If either form is not submitted, or is incomplete or delinquent, a
penalty may be imposed. Go to #5 and #5A.
5) Submission of either form may lead to a taxpayer examination.
5A) Submission of either form may lead to a material advisor
examination. As part of the examination, IRS may request an investor
list. Go to #6.
6) The material advisor is required to maintain an investor list. If
the list is not provided within 20 business days, a penalty may be
imposed.
Non-reportable abusive transactions:
1) Taxpayer participates in an abusive transaction that is not
reportable. Go to #2.
1A) Promoter participates in an abusive transaction that is not
reportable by the promoter, including cases in which the promoter does
not meet the definition of a material advisor. Go to #2A.
2) Not required to file Form 8886. Go to #3.
2A) Not required to file Form 8918. Go to #3A.
3) When the taxpayer is identified by IRS, an examination may follow.
3A) When the promoter is identified by IRS, an investigation may
follow. As part of the investigation, IRS may request an investor list
from the promoter. Go to #4.
4) The promoter is not required to maintain an investor list.
Therefore, if the list is not provided within 20 business days, there
is no penalty.
Source: GAO analysis of IRS information.
[End of figure]
IRS has had various forms for filers reporting ATAT information. For
example, taxpayers are to file Form 8886, Reportable Transaction
Disclosure Statement, to disclose their reportable transactions. Form
8918, Material Advisor Disclosure Statement, is to be filed by
material advisors. This form was created in 2007 to replace Form 8264,
Application for Registration of a Tax Shelter, which was to be filed
by tax shelter organizers in order to describe a transaction and its
tax benefits when the transaction had certain potentially abusive
characteristics.
To enforce compliance, IRS has three interlocking efforts: promoter
investigations, investor examinations, and settlements. Figure 2
focuses on two IRS operating divisions--LB&I and SB/SE--that develop
and evaluate promoter leads for investigation and shows how each
division coordinates with others, including the Servicewide Abusive
Transaction Executive Steering Committee.[Footnote 12]
Figure 2: IRS Organizational Units and Coordinating Efforts for ATATs:
[Refer to PDF for image: illustration]
Top level:
Executive Steering Committee:
Provides IRS-wide coordination of ATAT efforts and consists of
executives from Counsel, Appeals, Criminal Investigation, and the
operating divisions.
Second level:
LB&I: Includes the Office of Tax Shelter Analysis, offshore teams, and
the Tax Shelter Steering Committee.
SB/SE: Includes the Office of Abusive Transactions and Technical
Issues and the Lead Development Center, which receives and develops
leads.
Third level:
External stakeholders: include Treasury, states, tax practitioners and
the press that provide and receive information.
Other internal stakeholders: such as the Tax Exempt and Government
Entities and the Criminal Investigation divisions that examine and
investigate ATATs, coordinate efforts, and raise emerging issues.
IRS field offices: perform examinations and investigations.
Counsel: works on guidance, helps develop issues, and litigates.
Appeals: (handles appeals).
Source: GAO analysis of IRS information.
Note: The Tax Exempt and Government Entities division, which is also
involved with ATATs, is not shown with the same prominence as LB&I and
SB/SE because we did not focus on it in our work.
[End of figure]
To make a case against abusive promoters, LB&I or SB/SE may examine
the tax returns of taxpayers investing in the promotions. If they make
such a case, the promoters will be unable to sell their ATATs to
taxpayers, and IRS will thus have fewer taxpayers to examine to see if
their investments in those promotions cause tax concerns. IRS may also
settle with groups of taxpayers without necessarily having to first
locate and examine each taxpayer who used a promotion. IRS induces
these taxpayers to come forward in disputed matters by, in some cases,
reducing their penalties in exchange for conceding tax benefits that
they claimed.
IRS Has Limited Trend Data on the Extent of Abusive Transactions, but
Many Tax Experts Said That the Ever-Changing Nature of ATATs Requires
Constant Vigilance:
IRS has limited trend data on the size of the ATAT problem in terms of
the number of abusive promoters and taxpayers investing in the
promotions. Estimating the extent of ATATs is at best an inexact
process because ATATs are often hidden. Data do not exist to measure
any ATATs unknown to IRS with much precision. Given these
difficulties, IRS used various qualitative and quantitative methods in
an attempt to develop some estimates in a 2006 study. IRS estimated
that about 1 million tax returns and between about 11,000 and 15,000
promoters were involved in ATATs in 2004.[Footnote 13] Of the 1
million returns, IRS estimated that more than half related to
"business and deduction" schemes and almost a third involved
"frivolous filer/anti-tax" schemes. IRS put the rest of the returns
into six other categories, such as corporate tax shelters. IRS had no
plans to update these estimates.
In the absence of data on trends in the use of ATATs, we interviewed a
number of tax experts in IRS or who were former top officials of IRS
or others well-known in the tax community. The experts we interviewed
told us that abusive tax avoidance is still a major issue but the
nature of ATATs has changed. A theme we heard from the experts is that
the mass marketing of ATATs has declined in recent years, although the
experts had different views on the extent of the decline. Mass
marketing refers to the sale of advice by promoters such as larger
accounting and tax law firms about how to structure ATATs. This advice
was sold to clients such as wealthy individuals and corporations. One
expert said that mass marketing of ATATs has significantly declined in
recent years. Others made statements like the battle has been "more
won than not."
Although mass marketing of ATATs has declined, these experts said that
ATATs have become more sophisticated and international in scope. In
addition to international transactions, ATATs are changing as false
credits and deductions, customized shelters, and return preparer fraud
entities have come more to the fore. IRS's "dirty dozen" list, its
annual listing of "notorious tax scams," ranks certain abuses that are
relevant to ATATs--such as return preparer fraud and trying to hide
income offshore--at the top.
The experts we interviewed gave us details about how ATATs involving
international features or tax return preparers changed. For instance,
one expert believed abuse took the form of improperly keeping income
offshore and not reporting it on a tax return. IRS officials said that
abusive transactions moved from being domestic transactions mass
marketed by large accounting and law firms to offshore transactions
promoted by smaller entities and more customized to the buyers. IRS
officials also said that ATATs seemed more international than before,
with promoters changing the countries and mechanics of their
promotions. In terms of tax return preparers, IRS officials told us of
promotions systematically using false or inflated deductions or
credits in tax returns. These schemes achieved broad coverage by
taking small scale abusive positions with individual clients. For
instance, preparers solicited clients in an attempt to improperly
claim the First-Time Homebuyer Credit, which first came into existence
in 2008.[Footnote 14]
Experts also told us that the nature of the ATAT problem is cyclical
and ever-changing and warrants continuous IRS vigilance. According to
IRS officials, IRS tries to proactively identify and thwart emerging
ATATs, especially early in their life cycles, pointing to early IRS
identification of taxpayers' attempts to improperly claim the First-
Time Homebuyer Credit.
Three data sources other than the above IRS estimates also give some
indication of changes in ATAT activity. First, taxpayers are
disclosing fewer listed reportable transactions (which are designated
as tax avoidance transactions) to IRS on Forms 8886. Taxpayers
disclosed about 6,100 of these transactions in 2007 and about 1,300
each in 2008 and 2009. However, IRS cannot know how many listed
transactions should have been disclosed but were not.
Second, the cumulative number of transaction types that IRS has
"listed" since 2000 has leveled off at 36. As figure 3 shows, IRS did
not designate any new listed transactions in years 2008 through 2010.
IRS officials said they detected fewer widely promoted avoidance
transactions suitable for listing in recent years. However, the number
of transaction types that are listed is not an indication of how many
promoters or taxpayers are using them.
Figure 3: Cumulative Number of Transactions Listed by IRS, Calendar
Years 2000 through 2010:
[Refer to PDF for image: line graph]
Calendar year: 2000;
Cumulative number of transactions: 13.
Calendar year: 2001;
Cumulative number of transactions: 16.
Calendar year: 2002;
Cumulative number of transactions: 21.
Calendar year: 2003;
Cumulative number of transactions: 27.
Calendar year: 2004;
Cumulative number of transactions: 32.
Calendar year: 2005;
Cumulative number of transactions: 33.
Calendar year: 2006;
Cumulative number of transactions: 33.
Calendar year: 2007;
Cumulative number of transactions: 35.
Calendar year: 2008;
Cumulative number of transactions: 36.
Calendar year: 2009;
Cumulative number of transactions: 36.
Calendar year: 2010;
Cumulative number of transactions: 36.
Source: GAO analysis of IRS information.
[End of figure]
Third, IRS identified two transactions of interest (TOI) in both 2007
and 2008 but none in 2009 or 2010. IRS designates a new promotion that
has the potential for tax avoidance or evasion as a TOI when IRS lacks
information to decide whether to list it as a tax avoidance
transaction. Doing so triggers a requirement for the taxpayers
involved to disclose information about the transaction to IRS on Form
8886.
IRS Shows Vigilance over ATATs in Its Enforcement Efforts, but
Quantifying the Impact of the Efforts Is Difficult:
IRS has investigated promoters in an effort to stop ATATs, examined
the tax returns of taxpayers participating in ATATs, and initiated
settlements with groups of taxpayers without necessarily having to
first locate and examine each taxpayer using the ATAT. IRS efforts in
these three areas are consistent with what we heard about how the ever-
changing problems with ATATs merit continued vigilance.
However, IRS has difficulty quantifying the IRS-wide impact of these
efforts on the ATAT problem. As context for discussing such IRS-wide
impacts, several examination and settlement initiative projects
considered by the Servicewide Abusive Transaction Executive Steering
Committee showed the challenges of working across IRS units. An
internal IRS report noted that decisions by different divisions on how
and when to report results on their work for one IRS-wide settlement
initiative initially resulted in inconsistent briefings to the
Enforcement Committee, to which the Steering Committee reports.
Another IRS team working on an ATAT issue informed the Steering
Committee about obstacles to coordinating among IRS units and about
needed mitigations. As our business networks report indicated,
competing examination efforts or plans across divisions made
prioritization difficult.[Footnote 15]
Investigations of Promoters Stopped Some Abuse, but IRS Has Incomplete
Information on Why Many Investigations Were Closed without Penalties
or Injunctions:
For fiscal years 2006 through 2010, about 100 SB/SE promoter
investigations annually resulted in injunctions for promoters to stop
what they were doing and/or penalties for what they did, as table 1
shows.[Footnote 16] The 561 investigations over the 5 years resulting
in injunctions or penalties were 38 percent of all investigations
closed. For the same years, SB/SE closed (e.g., discontinued for
various reasons) 905 investigations (62 percent) without penalties or
injunctions.
Table 1: SB/SE Closed Promoter Investigation Results, Fiscal Years
2006 through 2010:
Result: Penalties only;
2006: 49;
2007: 67;
2008: 58;
2009: 51;
2010: 46;
Total: 271.
Result: Injunctions only;
2006: 11;
2007: 15;
2008: 17;
2009: 20;
2010: 10;
Total: 73.
Result: Injunctions and penalties;
2006: 35;
2007: 37;
2008: 52;
2009: 57;
2010: 36;
Total: 217.
Subtotal for penalties and injunctions:
2006: 95;
2007: 119;
2008: 127;
2009: 128;
2010: 92;
Total: 561.
Result: Discontinued/surveyed/other[A];
2006: 213;
2007: 232;
2008: 157;
2009: 131;
2010: 172;
Total: 905.
Total:
2006: 308;
2007: 351;
2008: 284;
2009: 259;
2010: 264;
Total: 1,466.
Result: Discontinued/surveyed/other rate;
2006: 69%;
2007: 66%;
2008: 55%;
2009: 51%;
2010: 65%;
Total: 62%.
Source: GAO analysis of IRS information.
[A] "Discontinued" are closed after promoter contact, "surveyed" are
closed without promoter contact, and "other" cases include those in
which the promoter died (a rare occurrence).
[End of table]
This annual level of SB/SE investigations shows IRS's vigilance in
attempting to identify and pursue leads to address ATATs. According to
Lead Development Center (LDC) officials and documents, LDC develops
leads received from such sources as IRS revenue agents and officers
[Footnote 17] and practicing accountants who suggest an individual may
be involved in an abusive promotion. IRS field offices decide whether
to pursue an investigation. If an investigation cannot sustain a
penalty or injunction, it can be surveyed (closed without promoter
contact) or discontinued (closed after promoter contact). LDC
officials said that the reasons for surveyed or discontinued
investigations include the difficulty in proving abuse, the need to
balance limited resources and many priorities in addressing the most
egregious promoters, and the lack of harm to the government.
IRS had incomplete data on why investigations were discontinued or
surveyed. In fiscal year 2009, SB/SE discontinued 84 investigations,
surveyed 46, and closed 1 because the promoter died.[Footnote 18] Of
the 130 cases surveyed or discontinued, we could not analyze 30
because LDC officials said they did not receive the documentation and
3 because the documentation was incomplete. In over 65 percent of the
other 97 cases we could analyze, the investigations closed because the
parties were not actively promoting abusive transactions or because
IRS could not obtain enough evidence to support a penalty or
injunction.
In February 2011, LDC started using codes to capture the reasons for
surveying or discontinuing promoter investigations to have more
complete data on these reasons. SB/SE officials told us they plan to
promote consistency in the use of the reason codes by asking field
offices to describe why they selected the codes for each case and by
continually analyzing the different codes used. Because this process
had just started, we had no assurance how these plans would work or
how the reason-code data would be used to make decisions on the types
of investigations to start.
IRS had no criteria to indicate whether the SB/SE investigation
results in table 1 were at desired levels. While the effectiveness of
injunctions is apparent when they stop promotions, tax experts
questioned the effectiveness of penalties if they do not deter those
who will risk a penalty to engage in an abusive promotion. Without
criteria, IRS could not say whether having 62 percent of
investigations closed without penalties or injunctions was too many,
too few, or about right, which would be important information in
deciding which types of cases to select for investigation.
Regardless, IRS officials said that closing 62 percent of
investigations without penalty or injunction did not indicate any
flaws. They said that decisions about doing an investigation usually
cannot be made without some field work; decisions about continuing an
investigation with additional field work must be balanced with the
available field resources. These officials said they continually look
for ways to develop and refine leads before turning them over to
investigators because successful investigations of promoters drive
unscrupulous individuals out of business.
IRS Examined Thousands of Tax Returns Involving Suspected ATATs and
Recommended Billions of Dollars in Additional Taxes, but the Impact Is
Unclear:
The impact of examinations on the ATAT problem is uncertain.
Examinations of the returns from taxpayers involved in suspected ATATs
recommended billions of dollars in additional tax assessments from
fiscal years 2006 through 2010. IRS did not track how much of these
recommended amounts came from the ATATs versus other tax issues.
[Footnote 19] Further, the recommended amounts may not produce actual
tax assessments or collections when taxpayers dispute the recommended
amounts in the appellate or litigation processes. For examinations
closed in fiscal years 2006 through 2010:
* LB&I examinations of 9,400 tax returns with suspected ATATs
recommended additional assessments for all tax issues of $42.4
billion, of which taxpayers disagreed with about 84 percent.
* SB/SE examinations of 125,700 returns with suspected ATATs
recommended additional assessments for all issues of $6 billion, of
which taxpayers contested at least 54 percent in IRS's Appeals office.
[Footnote 20]
Neither LB&I nor SB/SE readily tracked how much of the additional
taxes were ultimately assessed and collected after examinations for
either ATAT or all tax issues. IRS officials told us that they started
tracking amounts collected from examinations that included ATAT issues
on a monthly basis during fiscal year 2011, but the tracking does not
isolate the amounts coming from the ATAT (as opposed to other) issues.
[Footnote 21]
For examinations that included taxpayer disclosures of reportable
transactions filed with OTSA, OTSA did not have a comprehensive view
of the results of examinations done by LB&I and SB/SE. After OTSA
sends the disclosures to LB&I and SB/SE for possible examination, OTSA
relies on the two IRS divisions to report back on the results.
However, each division reported results differently.
For LB&I examinations, the examiners were the source on the
examination results. OTSA officials said the examiners did not report
back on all results in a consistent manner because they were not
required to do so. For SB/SE examinations of the disclosures, SB/SE
officials said they collected the results for OTSA from data systems
and not from examiners. In general, SB/SE and LB&I officials said that
divisions track information differently because of different needs.
For example, SB/SE relies more on electronically capturing examination
results because it does more examinations of shorter duration compared
to LB&I.
According to SB/SE officials, SB/SE was unable to provide OTSA with
data in time for the May 2010 annual report to the Joint Committee on
Taxation due to its larger number of examinations. These SB/SE
officials also said that they did not review the accuracy of the SB/SE
data used in the annual reports. Without comprehensive or consistent
results on examinations of ATAT disclosures for the report to the
Joint Committee, IRS cannot be certain it is providing reliable
information to the Congress. Nor will IRS executives have the best
information available for making decisions about the number of
examinations to do and for evaluating their impacts.
IRS's Settlement Initiatives Involved Billions of Dollars, but Amounts
Collected and the Effect on ATATs Cannot Always Be Isolated:
In various ATAT settlement initiatives, IRS provided inducements for
taxpayers to come forward to IRS to resolve disputed matters. The
inducements sometimes took the form of reducing taxpayers' penalties
in exchange for taxpayers conceding tax benefits that they claimed.
IRS reported to the Joint Committee on Taxation that it had collected
billions of dollars from taxes, penalties, and interest from the
beginning of its 17 ATAT settlement initiatives through early 2010.
These dollar figures should not be considered the final word in
describing the 17 initiatives' results through early 2010. On one
hand, they did not include the results of field work and litigation
still occurring at the time of that report. On the other hand,
initiative results included some collections from taxpayers who did
not participate in the settlement but whose tax returns had been
examined because they were related to the relevant transaction.
[Footnote 22] Also, according to IRS officials, initiative results
sometimes included issues not targeted by the initiative. As noted
earlier, IRS's enforcement tracking systems only track ATAT results by
case and not by separate tax issues within a case.
Furthermore, the dollar amounts collected for the 17 ATAT initiatives
were not reported consistently to the Joint Committee on Taxation. For
instance, the dollar amount for the Global Settlement Initiative,
which aimed to resolve 21 unrelated abusive transaction issues under
one framework, was the amount of additional tax recommended, not the
amount collected. Also, the total for all of the ATAT initiatives as
reported to the Joint Committee did not include any dollars collected
from the very large-dollar LILO and similar Sale-In/Lease-Out (SILO)
ATAT initiatives. The responsible IRS group did not provide data on
the LILO initiative and provided data on adjustments to taxable
income, rather than the amount collected, on the SILO initiative.
Lacking data on how much additional tax ultimately was collected
limits information on the impact of the settlement initiative.
Better tracking of dollar collections could be considered for future
initiatives.[Footnote 23] However, IRS has not seen the need to start
new ATAT initiatives, which could be consistent with experts' view
that the extent of the ATAT problem has eased. Further, isolating the
impact on ATATs of settlement initiatives from the impacts of
examinations and promoter investigations is difficult to do,
especially when IRS does not have an IRS-wide system for tracking and
comparing the results from its enforcement efforts.
The AJCA Increased Abusive Transaction Disclosure Requirements and
Penalties, but Problems Remained:
The AJCA provided new tools to address ATATs. For material advisors,
it revised the requirements to disclose reportable transactions and
provide lists of their investors to IRS upon request or face
penalties. For taxpayers, the AJCA established requirements to
disclose reportable transactions or be subject to enhanced penalties.
OTSA received thousands of Forms 8886 from taxpayers to disclose
reportable transactions for 2007 through 2009, as table 2 shows.
Almost all of these disclosures were associated with loss
transactions--most of the losses had not been deemed by IRS to be tax
avoidance. OTSA officials said that the number of disclosures dropped
in 2008 because IRS combined multiple disclosures from one taxpayer
into one disclosure, and increased in 2009 because economic conditions
generated more losses that were disclosed as reportable transactions.
Table 2: Number of Form 8886 Reportable Transaction Disclosures by
Taxpayers, Calendar Years 2007 through 2009:
Reportable transaction category: Listed;
2007: 6,139;
2008: 1,348;
2009: 1,293.
Reportable transaction category: Non-listed, loss;
2007: 88,371;
2008: 50,782;
2009: 88,582.
Reportable transaction category: Non-listed, other than loss;
2007: 6,283;
2008: 712;
2009: 292.
Reportable transaction category: Total;
2007: 100,793;
2008: 52,842;
2009: 90,167.
Source: GAO analysis of IRS information.
[End of table]
If taxpayers do not file all required Forms 8886 or file incomplete or
inaccurate forms, IRS would lack the information that it needs to make
decisions on whether to examine the appropriateness of the
transactions being disclosed by taxpayers. Without this transparency,
abusive transactions are more likely to stay hidden from IRS.
OTSA Did Not Verify That It Received All Required Disclosures or That
They Were Complete:
OTSA Did Not Verify That It Received All Disclosures from Taxpayers:
According to OTSA officials, OTSA did not confirm that it always
received its copy of the required Form 8886 from taxpayers disclosing
a reportable transaction. Taxpayers must file one copy of the form
with their tax return and send a second copy directly to OTSA for
their initial year of participation. Absent a system to confirm that
OTSA always received its copy, IRS cannot know how prevalent this
problem might be. However, IRS knows that a problem exists because,
according to IRS officials, IRS examiners of tax returns have
identified some taxpayers who filed their Form 8886 with their tax
return but failed to send it to OTSA. If OTSA does not receive
disclosures, it cannot identify transactions that merit examination
for appropriateness as well as possible penalties.
For individual tax returns filed on paper, IRS had no return
processing indicator that would specify when a Form 8886 was received
with all types of returns. IRS had an indicator for corporate,
partnership, estate and trust, and tax-exempt returns but did not
update that indicator to cover all types of returns when it created
the Form 8886; extensive computer programming would have been
required. For electronically-filed tax returns with Form 8886
disclosures, OTSA officials said that they did not use existing IRS
data to verify if they received copies of the forms. In 2008, OTSA
investigated the viability of doing a match to verify if it received
its copies. OTSA had data problems and had not made the match a high
priority. OTSA officials said it will not do any match until it also
covers paper-filed returns to adhere to IRS's policy on treating paper-
and electronically-filed returns equally for purposes of verification.
Recognizing this policy, OTSA officials said that IRS was establishing
a new indicator for paper and electronic tax returns to identify each
Form 8886 filed. OTSA officials said that the new indicator, if it
works as intended, would allow them to identify paper and electronic
Form 8886 disclosures that OTSA has not received. OTSA officials said
that the new indicator would not be operational until September 2012
for use with 2011 tax returns filed in 2012.
Given that checking compliance in filing required Forms 8886 would be
facilitated by electronically-filed tax returns, OTSA does annual
studies on whether it should pursue authority from the Congress for
mandatory electronic filing for all taxpayers who file Form 8886.
[Footnote 24] Studies done in 2008, 2009, and 2010 indicated that
mandatory electronic filing would make processing the Form 8886 less
time-and labor-intensive and more accurate. However, all three studies
concluded that mandating electronic filing was not currently viable or
realistic, mainly because, according to the study reports, the great
majority of taxpayers filing the Form 8886 did not already file their
tax returns electronically and would have to change their filing
format. For example, for all Form 8886 filers in processing year 2009,
14 percent filed their tax return electronically, including 43 percent
of corporate filers, 32 percent of partnership filers, 11 percent of
individual filers, and 3 percent of estate and trust filers.
However, these OTSA studies did not examine whether the returns were
already being prepared on computers. If they were, taxpayers could
more readily comply with an electronic filing mandate. IRS data
compiled from codes collected on tax returns show that about two
thirds of all paper returns in 2008 (and about 92 percent when a paid
preparer was used) were prepared on a computer, printed, and mailed to
IRS. As another indication of the feasibility of requiring electronic
filing, the median adjusted gross income for individual Form 8886
filers in 2006 was about $1.4 million--an income level that would
likely be able to afford a computer or a paid preparer in filing tax
returns.
Instead of pursuing mandatory electronic filing, IRS planned to begin
using barcode technology in early 2011. IRS's plan assumes that
taxpayers can use computers to download and complete the Form 8886
from the irs.gov Web site. A barcode on the Form 8886 will be updated
automatically from specific fields on the form and then printed on the
paper return. IRS can then scan the barcode without verifying the
information. Even in this case, taxpayers would still need to send a
paper copy of their Form 8886 directly to OTSA.
OTSA May Not Have Received All Forms from Material Advisors:
Material advisors may not have filed all of their Forms 8918 or 8264
with OTSA, as required.[Footnote 25] By analyzing IRS Statistics of
Income (SOI) samples of 2007 partnership and S corporation tax
returns, we found 668 entities that reported that they filed or were
required to file a material advisor form on a reportable transaction.
[Footnote 26] When we matched the Employer Identification Numbers of
these entities against the identifying numbers that appeared on the
Forms 8918 and 8264 in OTSA's material advisor database, only about 5
percent of the 668 entities appeared in the database.
For 2007, OTSA believed many partnership and S corporation filers
likely confused the citation specified for material advisors (Internal
Revenue Code (IRC) section 6111) with section 6011, which deals with
the investor disclosure on Form 8886. As the section numbers are
similar and the partnership and S corporation forms did not
specifically ask if the taxpayer filed a Form 8918 or was a material
advisor, OTSA believed that the filers would incorrectly answer the
section 6111 question on the return, thinking that they were affirming
they had a section 6011 obligation. In 2008 and 2010, IRS revised the
relevant question on the partnership and S corporation forms,
respectively, specifically mentioning the Form 8918 and material
advisor disclosure. OTSA believes this change will correct the
mismatches we found. It intends to match the material advisor database
against SOI data for 2008 partnership forms to determine if the
disparity persists in a year after the question revision. However,
matching S corporation data would have to await the availability of
SOI information for 2010.
IRS Did Not Verify That All Disclosures Were Complete:
IRS received more than 325,000 Forms 8886 for 2006 through 2009. IRS
reviewed about 10 percent for completeness,[Footnote 27] which meant
that IRS could understand the transaction and its tax benefits and
identify the parties involved. After the review, IRS sent 177 letters
to taxpayers on apparently incomplete disclosures, asking for the
missing information to be submitted. IRS later determined that 111 (63
percent) of the taxpayers responding did not have either a disclosure
requirement or a completeness issue. For various reasons, IRS did not
resolve whether all of the other 66 taxpayers had disclosure
requirements or complete disclosures.
In January 2011, OTSA officials said they were contemplating a new
process for reviewing all disclosures for completeness based on a 10-
question checklist. The completed checklist is to be used to determine
whether the disclosure is incomplete and what action to take. OTSA
officials said that final decisions on the details of the process have
not been made and that the process would not be established until the
2012 filing season at the earliest. Afterward, its success would not
be analyzed until after two years of reviews had occurred according to
these officials. As a result, IRS will not know for at least two years
whether the new process will overcome the previous problems in
deciding if disclosures were really incomplete and in following up
with the taxpayers. Without an adequate review process in place, IRS
risks accepting filed disclosure forms from taxpayers that do not
completely describe the potentially abusive transaction.
Non-Material Advisors Did Not Provide Investor Lists to IRS in a
Timely Manner and Do Not Face Timeliness Penalties, unlike Material
Advisors:
Even if the promoter is not a material advisor, IRS still can request
lists of investors. Promoters of abusive schemes who do not provide
lists to IRS when requested could continue their schemes. Receiving
investor lists from these promoters sooner enables IRS to more quickly
determine any harm to the government and obtain injunctions working
with the Department of Justice to stop abusive promoter activity.
OTSA officials said they were unaware of IRS comprehensively tracking
how often lists requested from material advisors were not received on
time. IRS had data on how often material advisors were penalized for
not keeping the lists or providing them on time. For 2008 and 2009,
OTSA received 11 investor lists within the required 20 business days
after the request under section 6112 and did not need to assess
timeliness-related penalties under IRC section 6708. Outside of OTSA,
IRS assessed five penalties against material advisors for requested
investor lists during 2008 and 2009.
Unlike for material advisors, non-material advisors are not subject to
the 20-business-day standard for timeliness under section 6112, or to
the section 6708 penalty for not meeting that timeliness standard.
[Footnote 28] Based on our interviews with 27 SB/SE revenue agents who
do promoter investigations, they generally agreed that many of the non-
material advisors do not quickly provide the lists. We sought such
information from SB/SE revenue agents who investigated promoters
because most of their investigations involve non-material advisors and
because SB/SE did not track how often and how quickly the requested
investor lists are received. Fourteen agents provided data on how
quickly they received the lists for 54 ongoing investigations of non-
material advisors. These non-generalizable data show that IRS received
13 of the 54 requested lists (24 percent) within 20 business days of
the request date. IRS received another 22 lists (41 percent) after the
20 days (7 months to receive on average). IRS had not received 19
lists, (35 percent) of which 18 had exceeded 20 business days.
To induce non-material advisors to provide investor lists, the agents
provided options and differing opinions on their possible impacts.
* Many agents said that they issued summonses for investor lists.
[Footnote 29] Some said that bringing a summons to their first meeting
with a promoter expedited receiving the lists while one agent said
that some local IRS offices do not encourage bringing a summons to the
first meeting.
* Agents said that extending the statute of limitations[Footnote 30]
could help but raises difficulties. Taxpayers could be burdened by
having to keep records longer. IRS officials also had concerns in
certain circumstances, about relying on the extended statute of
limitations provided by the AJCA for undisclosed listed transactions.
[Footnote 31]
* Some revenue agents said that establishing a penalty on non-material
advisor promoters who do not provide investor lists within 20 business
days could help. Promoters who view their products as legitimate might
quickly provide a list to avoid this penalty. This penalty might not
prompt promoters who hide their transactions because they would not
pay any penalty or they believe they can escape detection. The new
penalty could be limited to those meeting the definition of a promoter
for IRC sections 6700 and 6701.
Another option for getting investor lists from promoters who are not
material advisors would be to lower the thresholds for material
advisors, which IRS had once considered.[Footnote 32] If these
material advisor thresholds were lowered, more promoters of reportable
transactions could be required to maintain lists and be penalized for
not providing them. However, burdens would increase for promoters with
legitimate products, and those who were not legitimate may still not
be material advisors and may therefore avoid the requirement.
Abusive Transaction Penalty Assessments Increased after AJCA
Implementation:
The AJCA revised or added penalties to address abusive transactions.
For the revised penalties, their annual number and aggregate dollar
amount of penalty assessments increased at least part of the time
since AJCA passage in 2004.[Footnote 33] For example, starting in
2004, the AJCA changed a penalty imposed by section 6700 on promoters
of abusive tax shelters from a maximum of $1,000 to 50 percent of the
gross income from a promotion. As a result, IRS assessed penalties
over $1 million against some promoters. Compared to 2004, the annual
aggregate number and amount of penalty assessments was higher through
2009, as figure 4 shows.
Figure 4: IRC Section 6700 Penalty Assessments on Promoters of Tax
Shelters, Fiscal Years 2004 through 2009:
[Refer to PDF for image: multiple line graph]
Fiscal Year: 2004;
Number of assessments: 15;
Dollar amount of assessments: $6 million.
Fiscal Year: 2005;
Number of assessments: 65;
Dollar amount of assessments: $46 million.
Fiscal Year: 2006;
Number of assessments: 78;
Dollar amount of assessments: $34 million.
Fiscal Year: 2007;
Number of assessments: 94;
Dollar amount of assessments: $43 million.
Fiscal Year: 2008;
Number of assessments: 164;
Dollar amount of assessments: $55 million.
Fiscal Year: 2009;
Number of assessments: 140;
Dollar amount of assessments: $55 million.
Source: GAO analysis of IRS information.
[End of figure]
AJCA provisions revised two penalties for IRS's use against abusive
transactions (see appendix II for details). For example, one provision
[Footnote 34]--creating IRC section 6662A--augmented the existing
accuracy-related penalty[Footnote 35] with an accuracy-related penalty
for reportable transaction understatements. From fiscal year 2005
through 2009, the number of penalties and aggregate dollar amount
generally rose each year.
The AJCA added or amended three reportable-transaction disclosure
penalties, applying to taxpayers in the first case and material
advisors in the others (see appendix II for details).
* A new penalty imposed by IRC section 6707A is for taxpayers who fail
to adequately disclose reportable transactions. Most of the penalty
assessments were for $100,000 or $200,000.
* A new penalty imposed by section 6707 is for material advisors who
fail to adequately disclose reportable transactions. Compared to the
6707A penalty on taxpayers, fewer material advisors were penalized,
but most of their penalty amounts exceeded $1 million, resulting in
higher aggregate penalty amounts.
* A penalty imposed by section 6708 is for material advisors who fail
to maintain investor lists or provide them to IRS within 20 business
days after the request. Most penalty assessments ranged from $740,000
to $1.1 million.
Figure 5 shows the number and dollar amount of assessments for the
first two penalties for not adequately disclosing reportable
transactions--section 6707A against taxpayers and section 6707 against
material advisors.
Figure 5: Number and Dollar Amount of Penalty Assessments for Not
Adequately Disclosing Reportable Transactions against Taxpayers under
Section 6707A and Material Advisors under Section 6707, Fiscal Years
2005 through 2009:
[Refer to PDF for image: vertical bar graph]
Number of assessments:
Taxpayers: 430;
Material advisors: 26.
Dollar amount of net assessments:
Taxpayers: $60 million;
Material advisors: $79 million.
Source: GAO analysis of IRS information.
Note: Net assessments are initial assessments less abatements
(reductions in assessments); taxpayer assessments do not reflect
adjustments that IRS made after the Small Business Jobs Act of 2010
passed.
[End of figure]
After IRS's increased use of the enhanced penalty sanctions under the
AJCA, the Congress amended section 6707A, decreasing the penalty
amounts for some cases. Many small businesses had received penalty
assessments that exceeded the benefits gained through the
transactions. The Small Business Jobs Act of 2010[Footnote 36] lowered
the penalty amounts (see appendix II for changes). Because the 2010
law change was retroactively effective for penalties assessed after
December 31, 2006, adjustments on many assessments were needed. IRS
officials said that they adjusted 898 closed cases as well as about
100 cases with penalty assessments that were still open as of February
2011.
Conclusions:
Because ATATs have been a long-standing, ever-changing, and often a
hidden problem for IRS, much activity in this area is left to IRS's
judgment. For the same reasons, no set of actions taken by IRS would
completely eliminate the problem. IRS has shown vigilance in pursuing
ATATs with a number of programs and offices trying to attack the
problem from different perspectives.
While measuring the impact of IRS's efforts is challenging, having
more information on the results of its enforcement efforts such as why
investigations were closed without penalties or injunctions would
better inform IRS management when making judgments about program
effectiveness and resource allocation. In addition, if IRS improved
the consistency and accuracy of its tracking and reporting of both its
ATAT and non-ATAT examination results, the information could be more
meaningful to managers as well as to the Joint Committee on Taxation.
Further, more could be done to ensure compliance with disclosure
requirements by material advisors and taxpayers. If OTSA could verify
that it received all required disclosures and that the disclosures
were complete, IRS would have more information to determine whether
the transactions disclosed were appropriate. However, paper filing
continues to be a barrier in processing disclosures, and actions to
have more disclosures filed electronically would be beneficial.
In addition, IRS has generally been successful in obtaining required
disclosures and investor lists from material advisors. Promoters who
do not meet the statutory definition to be a material advisor face no
requirements to provide IRS with their list of investors within 20
business days after IRS requested a list or no penalties for failing
to do so. If IRS started to monitor the timeliness of its receipt of
requested investor lists, IRS would be able to determine when actions
are needed to obtain the lists sooner. IRS also could consider taking
steps to get the lists sooner. Various administrative steps, such as
not always having a summons in hand when meeting a suspected promoter,
slow IRS. Addressing such concerns could help ensure that promoters
and taxpayers are complying with congressional intent in requiring
provision of the investor lists and better position IRS to ensure that
taxes legally due to Treasury are paid.
Matter for Congressional Consideration:
The Congress should consider instituting a penalty on non-material
advisor promoters for failing to provide investor lists to IRS within
a specified time period when requested, comparable to the 20-business-
day requirement for material advisors.
Recommendations for Executive Action:
We recommend that the Commissioner of Internal Revenue take the
following ten actions:
1. To focus resources on promoter investigations most likely to stop
abuse, establish a process to ensure that field office staff
consistently apply the recently created reason codes for closing
investigations without penalties or injunctions, and document how the
results are analyzed and used in decisions on investigations to start.
2. To improve reporting on the results of examinations on ATAT issues,
a. require all divisions to supply similar, consistent results from
existing data systems;
b. separately track the tax amounts recommended, assessed, and
collected between ATAT issues and non-ATAT issues; and:
c. establish a process to review the accuracy of examination data
prior to its inclusion in future reports to the Joint Committee on
Taxation.
3. To ensure that Forms 8886 filed with tax returns are also filed
with OTSA, after establishing a new indicator for paper and electronic
tax returns, establish a process to periodically check whether the
filers met their filing obligations with OTSA.
4. To improve IRS's next study of whether Form 8886 should be filed
electronically, identify how often filers already use computers to
prepare these forms.
5. To ensure material advisor disclosure forms are filed, investigate
why partnerships and S corporations often did not file a form with
OTSA even though they reported on their tax returns that they filed
the form with IRS or had a requirement to file.
6. To correct problems with its review of the completeness of
disclosure forms, ensure that OTSA establishes a new process to review
completeness and monitor its success.
7. To monitor the timeliness of investor list receipts,
comprehensively track the elapsed days it takes for material advisors
and non-material advisors to provide the lists to IRS.
8. To induce non-material advisors to provide investor lists to IRS
within a specified time, take steps such as requiring IRS staff to
bring a summons for an investor list to the first interview with a
suspected non-material advisor, and reevaluating the idea of lowering
material advisor dollar thresholds.
Agency Comments and Our Evaluation:
We sent a draft of this report to the Commissioner of Internal Revenue
for comment. We received written comments on the draft from IRS's
Deputy Commissioner for Services and Enforcement on April 29, 2011
(for the full text of the comments, see appendix III). IRS agreed that
better data may lead to better resource allocation decisions and
improved ATAT enforcement efforts. Of our ten recommendations, it
fully agreed with seven, disagreed with one (number 7), and partially
agreed with two (numbers 8 and 2b).
In describing actions on the recommendations with which IRS had
agreements, the Deputy Commissioner stated that IRS would do the
following:
* update the Internal Revenue Manual's handling of reason codes for
surveying or discontinuing investigations and evaluate whether any of
the reason data collected warrant changing how investigations are
selected;
* ensure that IRS uses the same databases and methodologies (such as
across IRS divisions) for public reporting on the examination results
of ATAT issues;
* develop criteria for consistently using IRS examination result data
and a consistent methodology for validating the data before they are
released (such as to the Joint Committee on Taxation);
* establish a new indicator and a process to regularly review whether
filers met their disclosure obligations with OTSA;
* improve its next study of whether Form 8886 should be filed
electronically by identifying how many Form 8886 filers use computers
to prepare the form;
* test mismatches of partnership and S corporation information with
OTSA information to identify potentially unfiled forms; and:
* formalize procedures to identify, evaluate, and follow up on
incomplete disclosures.
IRS disagreed with our recommendation on comprehensively tracking the
elapsed time for any advisors to provide investor lists when IRS
requests. IRS commented that the information currently contained in
individual case files reflects when information has been requested and
received, but that resource and capability constraints may outweigh
the benefits of capturing this additional information on a systematic
basis. We agree that costs and benefits must be carefully weighed. In
that regard, IRS's data collection would not have to be elaborate. For
instance, SB/SE officials already send data on the investor lists
received to a central list keeper. These officials also could send the
dates when each list was requested and received to that same office.
In that way, SB/SE could see if the slowness in receiving some lists
that we found is prevalent across the division, and other divisions
could do the same thing. If the slowness is prevalent, IRS officials
would then have the information needed to make decisions on whether
IRS is doing all it can to quickly determine and address any harm to
the government. Finally, the data collection is possible in that we
were able to collect such data from some revenue agents on the
timeliness of investor lists received.
IRS partially agreed with our recommendation on two options for
inducing non-material advisors to provide investor lists within a
specified time. It did not fully agree with the first option. In lieu
of requiring summonses to be prepared for the first meeting with non-
material advisors, IRS stated that its Internal Revenue Manual would
recommend that IRS agents consider preparing summonses to use at
initial meetings with possibly problematic non-material advisors. We
encourage IRS to track how often IRS agents provide summonses at these
meetings in the future and whether their doing so expedites obtaining
non-material advisor investor lists. If IRS still finds obtaining the
lists difficult after changing the Internal Revenue Manual, we
encourage it to take additional steps to receive the lists more
quickly. IRS agreed with the second option on reevaluating whether
lowering material advisor thresholds would be useful. It said it would
gather input to make that determination.
IRS also partially agreed with our recommendation that it separately
track the tax amounts recommended, assessed, and collected between
ATAT issues and non-ATAT issues. Although IRS agreed that tracking
these amounts by issue (rather than by case as is currently done)
might provide valuable information for management, it cited resource
and capability constraints in doing the tracking. Recognizing the
value of tracking this management information, IRS should explore
approaches to leverage its resources in order to provide more accurate
and consistent data on the results of its examinations. This can help
better inform IRS and the Congress about whether the ATAT examinations
are an efficient use of resources in producing desired impacts.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its issue date. At that time, we will send copies to the
Secretary of the Treasury, the Commissioner of Internal Revenue, and
other interested parties. The report will also be available at no
charge on GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-9110 or at whitej@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix IV.
Signed by:
James R. White:
Director, Tax Issues:
Strategic Issues Team:
[End of section]
Appendix I: Additional Details about Scope and Methodology:
Results of the Internal Revenue Service's (IRS) Promoter
Investigations, Investor Examinations, and Settlement Initiatives:
The statistics we analyzed came from many sources. We obtained data
related to promoter investigations from the Lead Development Center's
(LDC) database within IRS's Small Business/Self-Employed division.
Information about examinations came from IRS's Audit Information
Management System-Computer Information System (A-CIS). IRS collected
information on settlement initiatives from initiative participants
throughout the organization.
To obtain information on why promoter investigations were either
discontinued or surveyed by IRS, we obtained documentation on these
investigations from LDC for fiscal year 2009. LDC received this
documentation, which provided the reasons the promoter investigations
were discontinued or surveyed, from examiners who performed the
investigations. Of 130 investigations that were either discontinued or
surveyed, we analyzed documentation on 97 investigations. We could not
analyze the remaining 33 investigations because either LDC did not
receive the documentation or the documentation was incomplete. From
our analysis of the 97 investigations, we identified the reasons these
investigations were either discontinued or surveyed.
Results of IRS's Implementation of the Abusive Tax Avoidance
Transaction (ATAT) Disclosure and Sanction Provisions Enacted in the
American Jobs Creation Act of 2004 (AJCA):
To evaluate the results of IRS's implementation of the AJCA, we
selected those sections of the act for which IRS had data on the
disclosures and penalties. We used data from different sources. We
obtained ATAT disclosure information from the reportable transaction
and material advisor databases kept by the Office of Tax Shelter
Analysis (OTSA) and penalty information from IRS's Enforcement Revenue
Information System (ERIS). Criteria we used to evaluate the AJCA's
results included whether (1) OTSA received all the reportable
transaction and material advisor forms it should have, (2) submitted
reportable transaction disclosure forms met OTSA's standard for
completeness, (3) IRS received investor lists from material advisors
within 20 business days of the time requested, and (4) the AJCA's
introduction of new penalties and penalty amounts increased the annual
number and aggregate dollar amount of ATAT penalties assessed.
To determine if IRS's requirement for material advisor disclosures to
be filed with OTSA was met, we tested the extent for partnership and S
corporation tax returns. The returns we tested were in the IRS
Statistics of Income (SOI) division's samples of partnership and S
corporation tax returns for 2007, the last year for which we had
information during our SOI work.[Footnote 37] These returns had a line
item asking taxpayers if they had disclosed, or needed to disclose,
information about material advisors. For those answering "yes," we
confirmed whether OTSA's material advisor database showed them filing
a material advisor form from the time the AJCA was enacted through
much of 2010. After discovering that the database often showed no
material advisor forms filed, we followed up with OTSA.
To determine how much time elapsed from when IRS requested lists of
investors with non-material advisor promoters until when it received
them, we used an IRS spreadsheet provided in August 2010 of open
investigations for which IRS had received lists. This spreadsheet
showed investigations being conducted by 90 investigators. We used
this spreadsheet to pinpoint IRS investigators from whom we could
collect information, rather than to project to a universe of
investigators or investigations. From the spreadsheet, we selected the
11 investigators with the most open investigations. We selected
another 20 investigators randomly. We also asked to meet with all of
the selected investigators in groups to ask general questions about
their impressions of how easy or hard it was to obtain the lists. We
met with or received written answers from 27 investigators.
At our instruction, IRS sent each of the selected investigators a
template asking for the dates on which investor lists were requested
and received for each investigation. Fourteen investigators provided
dates on when investor lists were requested and received from
promoters who were not identified as tax return preparers. We excluded
preparers because they are required to submit copies of tax returns or
the names of taxpayers for whom they prepared tax returns to IRS when
requested.
Reliability of Data from IRS Databases That We Used:
We found the IRS databases we used to be reliable for the purposes of
this report. We had tested the reliability of A-CIS, ERIS, and SOI
data for previous reports,[Footnote 38] and we supplemented our
knowledge through interviews with IRS officials and through
documentation review. For LDC and OTSA databases, we reviewed
documentation and interviewed IRS officials. When we matched OTSA and
SOI data, where appropriate, we ran electronic checks and compared
output to other information for reasonableness purposes.
We conducted this performance audit from July 2009 through May 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Selected American Jobs Creation Act of 2004 Provisions
Related to Tax Shelters:
The American Jobs Creation Act of 2004 (AJCA) provided new or revised
tools related to what it called tax shelters.[Footnote 39] For
example, it established requirements for material advisors to disclose
reportable transactions and provide lists of their investors to IRS.
It also added or revised penalties and other sanctions, such as
censures and injunctions. Information follows on the AJCA-created or
AJCA-changed sections of the Internal Revenue Code (IRC) that we
reviewed. Following that is similar information related to amendments
to title 31 of the United States Code, dealing with money and finance.
IRC Section 6111--Disclosure of Reportable Transactions by Material
Advisors:
The AJCA provision amending section 6111 repealed the law on
registering tax shelters as defined therein and began requiring each
material advisor to describe any reportable transaction and its
potential tax benefits on an information return filed with IRS on a
timely basis. The main information return submitted by material
advisors is the Material Advisor Disclosure Statement (Form 8918),
which superseded the Application for Registration of a Tax Shelter
(Form 8264). Table 3 shows the numbers of these forms received from
2003 through 2009.
Table 3: Form 8918 and Form 8264 Filings, Calendar Years 2003 through
2009:
Calendar year: 2003;
Number of disclosures: 1,083.
Calendar year: 2004;
Number of disclosures: 686.
Calendar year: 2005;
Number of disclosures: 1,053.
Calendar year: 2006;
Number of disclosures: 449.
Calendar year: 2007;
Number of disclosures: 357.
Calendar year: 2008;
Number of disclosures: 1,012.
Calendar year: 2009;
Number of disclosures: 206.
Calendar year: Total;
Number of disclosures: 4,846.
Source: IRS.
[End of table]
IRC Section 6112--Investor Lists:
The AJCA provision amending section 6112 required that a material
advisor must keep a list identifying each person for whom the advisor
acted as a material advisor for a reportable transaction, and provide
the list to the Secretary when requested in writing. Table 4 shows the
number of lists that IRS's Office of Tax Shelter Analysis (OTSA)
requested from 2006 through 2009.
Table 4: Number of Investor Lists Requested from Review of Material
Advisor Disclosures, Calendar Years 2006 through 2009:
Calendar year: 2006;
Number of investor lists requested: 8.
Calendar year: 2007;
Number of investor lists requested: 4.
Calendar year: 2008;
Number of investor lists requested: 3.
Calendar year: 2009;
Number of investor lists requested: 8.
Calendar year: Total;
Number of investor lists requested: 23.
Source: IRS.
Note: OTSA officials said they did not know how many lists OTSA
requested from 2003 through 2005, but to the best of their knowledge
none was requested.
[End of table]
IRC Section 6501(c)(10)--Statute of Limitations for Undisclosed Listed
Transactions:
The AJCA amended section 6501 to extend the statute of limitations for
IRS to assess taxes related to undisclosed listed transactions.
Generally, the statute of limitations runs for 3 years after a tax
return is filed or due, whichever is later. As amended by the AJCA,
the statute of limitations with regard to listed transactions can
extend beyond 3 years up to 1 year after the earlier of the date that
(1) the taxpayer discloses pursuant to section 6011, or (2) a material
advisor satisfied the Secretary's request for an investor list under
section 6112, including the name of the taxpayer in question.
According to IRS, it did not have systemic data on whether assessments
were made pursuant to section 6501(c)(10) because each case is
different and systemic information would be unreliable.
IRC Section 6662A--Accuracy-Related Penalty:
The AJCA provision creating section 6662A augmented the existing 20
percent accuracy-related penalty of section 6662 with a new accuracy-
related penalty for understated income from reportable transactions.
If a taxpayer disclosed a reportable transaction, the penalty would
equal 20 percent of the understatement amount. If the taxpayer did not
disclose the transaction, the penalty would equal 30 percent of the
understatement amount. Table 5 shows an increase in the number of
these penalties for fiscal years 2005 through 2009 as well as in the
number of abatements, or reductions, of those penalties.[Footnote 40]
Table 5: Accuracy-Related Penalty Assessments for Reportable
Transactions, Fiscal Years 2005 through 2009:
FY: 2005;
Number of penalty assessments: 7;
Penalty assessment amounts: $56,853;
Number of penalty abatements: 0;
Penalty abatement amounts: $0;
Net penalty assessment amounts: $56,853;
Penalty collection amounts: $36,683.
FY: 2006;
Number of penalty assessments: 37;
Penalty assessment amounts: $608,188;
Number of penalty abatements: 4;
Penalty abatement amounts: $15,472;
Net penalty assessment amounts: $592,716;
Penalty collection amounts: $264,252.
FY: 2007;
Number of penalty assessments: 40;
Penalty assessment amounts: $668,957;
Number of penalty abatements: 4;
Penalty abatement amounts: $13,358;
Net penalty assessment amounts: $655,599;
Penalty collection amounts: $110,842.
FY: 2008;
Number of penalty assessments: 123;
Penalty assessment amounts: $1,367,724;
Number of penalty abatements: 21;
Penalty abatement amounts: $101,718;
Net penalty assessment amounts: $1,266,006;
Penalty collection amounts: $176,860.
FY: 2009;
Number of penalty assessments: 133;
Penalty assessment amounts: $1,056,061;
Number of penalty abatements: 23;
Penalty abatement amounts: $130,832;
Net penalty assessment amounts: $925,229;
Penalty collection amounts: $248,034.
FY: Total;
Number of penalty assessments: 340;
Penalty assessment amounts: $3,757,783;
Number of penalty abatements: 52;
Penalty abatement amounts: $261,380;
Net penalty assessment amounts: $3,496,403;
Penalty collection amounts: $836,671.
Source: IRS.
[End of table]
IRC Section 6700--Penalty on Promoters of Abusive Tax Shelters:
The AJCA amended section 6700 to change the penalty amounts. Section
6700 imposes a penalty on persons who (1) organize or assist in the
organization of any entity, plan, or arrangement or (2) participate,
directly or indirectly, in the sale of any interest in an entity,
plan, or arrangement. For the section 6700 penalty to apply, the
person must also make, furnish, or cause another person to make or
furnish (1) a gross valuation overstatement (as defined therein) as to
any material matter or (2) a statement with respect to any tax benefit
by reason of holding an interest in the entity or participating in the
plan or arrangement. Further, the person to whom the penalty applies
must know or have reason to know that the statement is false or
fraudulent in any material matter. Prior to the enactment of the AJCA,
the maximum penalty under section 6700 was $1,000 for each activity
(entity or arrangement). The AJCA changed the penalty imposed on
someone who knowingly makes a false statement (but not to making a
gross valuation overstatement) to 50 percent of the person's gross
income from activity involving that statement. Table 6 shows penalties
assessed under section 6700 from fiscal years 2004 through 2009.
Table 6: Penalty Assessments on Promoters, Fiscal Years 2004 through
2009:
FY: 2004;
Number of penalty assessments: 15;
Penalty assessment amounts: $5,904,952;
Penalty abatement amounts: $0;
Penalty collection amounts: $360,457.
FY: 2005;
Number of penalty assessments: 65;
Penalty assessment amounts: $45,531,570;
Penalty abatement amounts: $3,442,696;
Penalty collection amounts: $866,745.
FY: 2006;
Number of penalty assessments: 78;
Penalty assessment amounts: $33,582,766;
Penalty abatement amounts: $221,049;
Penalty collection amounts: $3,886,515.
FY: 2007;
Number of penalty assessments: 94;
Penalty assessment amounts: $43,081,451;
Penalty abatement amounts: $24,852,419;
Penalty collection amounts: $501,513.
FY: 2008;
Number of penalty assessments: 164;
Penalty assessment amounts: $54,703,259;
Penalty abatement amounts: $8,130,233;
Penalty collection amounts: $642,067.
FY: 2009;
Number of penalty assessments: 140;
Penalty assessment amounts: $54,684,280;
Penalty abatement amounts: $8,616,000;
Penalty collection amounts: $328,289.
FY: Total;
Number of penalty assessments: 556;
Penalty assessment amounts: $237,488,278;
Penalty abatement amounts: $45,262,397;
Penalty collection amounts: $6,585,586.
Source: GAO analysis of IRS data.
[End of table]
IRC Section 6707--Penalty for Failing to Furnish Information Regarding
Reportable Transactions:
The AJCA provision amending section 6707 repealed the penalty for
failure to register tax shelters and established a new penalty. The
new penalty imposes on material advisors who fail to disclose
reportable transactions or who file false or incomplete information a
$50,000 penalty, unless the failure is related to a listed
transaction; if the failure is related to a listed transaction, the
amount is increased to the greater of $200,000 or 50 percent (75
percent for an intentional failure or act) of the gross income from
the transaction. Table 7 shows assessments of this penalty from fiscal
years 2005 through 2009.
Table 7: Penalty Assessments on Material Advisors for Failure to
Disclose Reportable Transactions, Fiscal Years 2005 through 2009:
FY: 2005;
Number of penalty assessments: 1;
Penalty assessment amounts: $3,000;
Penalty abatement amounts: $0;
Penalty collection amounts: $0.
FY: 2006;
Number of penalty assessments: 11;
Penalty assessment amounts: $151,699,805;
Penalty abatement amounts: $107,558,179;
Penalty collection amounts: $8,199,802.
FY: 2007;
Number of penalty assessments: 3;
Penalty assessment amounts: $13,316,575;
Penalty abatement amounts: $3,657,008;
Penalty collection amounts: $9,659,567.
FY: 2008;
Number of penalty assessments: 2;
Penalty assessment amounts: $1,934,405;
Penalty abatement amounts: $0;
Penalty collection amounts: $1,296,219.
FY: 2009;
Number of penalty assessments: 9;
Penalty assessment amounts: $23,751,151;
Penalty abatement amounts: $0;
Penalty collection amounts: $23,749,901.
FY: Total;
Number of penalty assessments: 26;
Penalty assessment amounts: $190,704,936;
Penalty abatement amounts: $111,215,187;
Penalty collection amounts: $42,905,489.
Source: GAO analysis of IRS data.
[End of table]
IRC Section 6707A--Penalty for Failure to Disclose Reportable
Transactions:
The AJCA provision creating 6707A established a penalty on any person
who fails to include with any return or statement any required
information on a reportable transaction. Generally, as amended by the
Small Business Jobs Act of 2010, the penalty is 75 percent of the
decrease in tax shown on the return resulting from the transaction, or
which would have resulted if the transaction complied with federal tax
laws. The maximum penalty amount is the same as the penalty amount
prior to the change which is $50,000 ($10,000 for an individual),
except for listed transactions for which the penalty is $200,000
($100,000 for an individual). The minimum penalty amount is $10,000
($5,000 for an individual). Table 8 shows the assessments for this
penalty from fiscal years 2005 through 2009. However, IRS was
adjusting these amounts in light of the 2010 amendment.
Table 8: Penalty Assessments on Taxpayers for Failure to Disclose
Reportable Transactions, Fiscal Years 2005 through 2009:
FY: 2005;
Number of penalty assessments: 0;
Penalty assessment amounts: $0;
Penalty abatement amounts: $0;
Penalty collection amounts: $0.
FY: 2006;
Number of penalty assessments: 0;
Penalty assessment amounts: $0;
Penalty abatement amounts: $0;
Penalty collection amounts: $0.
FY: 2007;
Number of penalty assessments: 1;
Penalty assessment amounts: $200,000;
Penalty abatement amounts: $0;
Penalty collection amounts: $200,000.
FY: 2008;
Number of penalty assessments: 115;
Penalty assessment amounts: $18,350,000;
Penalty abatement amounts: $2,977,000;
Penalty collection amounts: $5,510,250.
FY: 2009;
Number of penalty assessments: 314;
Penalty assessment amounts: $47,081,100;
Penalty abatement amounts: $2,990,000;
Penalty collection amounts: $7,957,479.
FY: Total;
Number of penalty assessments: 430;
Penalty assessment amounts: $65,631,100;
Penalty abatement amounts: $5,967,000;
Penalty collection amounts: $13,667,729.
Source: GAO analysis of IRS data.
Note: Table amounts do not reflect adjustments that IRS made after the
Small Business Jobs Act of 2010 passed.
[End of table]
IRC Section 6708--Failure to Maintain Investor Lists:
The AJCA provision amending section 6708 modified the penalty for
failing to maintain the required lists by making it a time-sensitive
penalty instead of a per investor penalty. Thus, a material advisor
required to maintain an investor list who fails to make the list
available upon written request to the Secretary within 20 business
days after the request will be subject to a $10,000 per day penalty.
Table 9 shows assessments for this penalty from fiscal years 2005
through 2009.
Table 9: Penalty Assessments on Material Advisors for Failure to
Maintain Investor Lists, Fiscal Years 2005 through 2009:
FY: 2005;
Number of penalty assessments: 0;
Penalty assessment amounts: $0;
Penalty abatement amounts: $0;
Penalty collection amounts: $0.
FY: 2006;
Number of penalty assessments: 4;
Penalty assessment amounts: $2,600;
Penalty abatement amounts: $0;
Penalty collection amounts: $2,600.
FY: 2007;
Number of penalty assessments: 3;
Penalty assessment amounts: $1,661,300;
Penalty abatement amounts: $1,281,000;
Penalty collection amounts: $11,300.
FY: 2008;
Number of penalty assessments: 0;
Penalty assessment amounts: $0;
Penalty abatement amounts: $0;
Penalty collection amounts: $0.
FY: 2009;
Number of penalty assessments: 5;
Penalty assessment amounts: $4,840,000;
Penalty abatement amounts: $0;
Penalty collection amounts: $11,256.
FY: Total;
Number of penalty assessments: 12;
Penalty assessment amounts: $6,503,900;
Penalty abatement amounts: $1,281,000;
Penalty collection amounts: $25,156.
Source: GAO analysis of IRS data.
[End of table]
IRC Section 7408--Enjoin Specified Conduct:
The IRC authorizes civil actions to enjoin anyone from promoting
abusive tax shelters or aiding or abetting tax liability
understatements. The AJCA expanded this rule so that an injunction
could be sought to enjoin a material advisor from engaging in specific
conduct subject to penalty under (1) section 6707, failure to file an
information return for a reportable transaction, or (2) section 6708,
failure to maintain or to furnish within 20 business days of the
Secretary's written request a list of investors for a reportable
transaction. According to the Lead Development Center (LDC), it does
not track injunctions specifically under section 7408. Table 10 shows
the number of injunctions that LDC obtained regardless of IRC section
from fiscal years 2003 through 2009.[Footnote 41]
Table 10: Number of Injunctions, Fiscal Years 2003 through 2009:
FY: 2003;
Number of injunctions: 30.
FY: 2004;
Number of injunctions: 47.
FY: 2005;
Number of injunctions: 51.
FY: 2006;
Number of injunctions: 67.
FY: 2007;
Number of injunctions: 73.
FY: 2008;
Number of injunctions: 87.
FY: 2009;
Number of injunctions: 75.
FY: Total;
Number of injunctions: 430.
Source: IRS.
[End of table]
Title 31, Section 330--Practice before the Department of the Treasury:
Before the AJCA, the Secretary was already authorized to suspend or
disbar from practice before the department someone's representative
who was incompetent, was disreputable, violated rules regulating
practice before the department, or with intent to defraud, willfully
and knowingly misled or threatened the person being represented or who
might be represented. The AJCA provision related to this section
expanded the sanctions the Secretary could impose for these matters in
two ways. First, it expressly permitted censure as a sanction. Second,
it allowed imposing a monetary penalty as a sanction as long as the
penalty did not exceed the gross income from the relevant conduct. The
penalty could be in addition to or instead of any suspension,
disbarment, or censure of the representative. According to Treasury's
Office of Professional Responsibility (OPR), OPR was already censuring
before the AJCA was enacted. The act clarified OPR's authority. Table
11 shows the number of OPR censures in fiscal years 2003 through 2009.
OPR officials said OPR had not assessed any monetary penalties.
Table 11: Number of Censures, Fiscal Years 2003 through 2009:
FY: 2003;
Number of censures: 9.
FY: 2004;
Number of censures: 16.
FY: 2005;
Number of censures: 11.
FY: 2006;
Number of censures: 9.
FY: 2007;
Number of censures: 18.
FY: 2008;
Number of censures: 14.
FY: 2009;
Number of censures: 2.
FY: Total;
Number of censures: 79.
Source: IRS.
[End of table]
Title 31, Section 5321--Penalty on Failure to Report Interest in
Foreign Financial Accounts:
Before the AJCA, citizens, residents, or persons doing business in the
United States could be penalized if they willfully did not keep
records and file reports when they made a transaction or maintained an
account with a foreign financial entity. The AJCA added a civil
penalty of up to $10,000 that could be imposed on anyone violating the
reporting requirement, whether willfully or not. The AJCA also
increased the prior-law penalty for willful behavior to the greater of
$100,000 or 50 percent of the amount of the transaction or account.
Table 12 shows the penalties imposed under section 5321 from 2003
through 2009.
Table 12: Penalty Assessments for Failure to Report Interest in
Foreign Financial Accounts, Calendar Years 2003 through 2009:
Calendar year: 2003;
Willful penalties assessed: Number: 7;
Willful penalties assessed: Amount: $52,725;
Non-willful penalties assessed: Number: 0;
Non-willful penalties assessed: Amount: $0.
Calendar year: 2004;
Willful penalties assessed: Number: 113;
Willful penalties assessed: Amount: $2,272,180;
Non-willful penalties assessed: Number: 9;
Non-willful penalties assessed: Amount: $65,807.
Calendar year: 2005;
Willful penalties assessed: Number: 181;
Willful penalties assessed: Amount: $6,054,054;
Non-willful penalties assessed: Number: 56;
Non-willful penalties assessed: Amount: $1,440,266.
Calendar year: 2006;
Willful penalties assessed: Number: 118;
Willful penalties assessed: Amount: $4,127,352;
Non-willful penalties assessed: Number: 74;
Non-willful penalties assessed: Amount: $726,670.
Calendar year: 2007;
Willful penalties assessed: Number: 59;
Willful penalties assessed: Amount: $2,496,793;
Non-willful penalties assessed: Number: 30;
Non-willful penalties assessed: Amount: $251,413.
Calendar year: 2008;
Willful penalties assessed: Number: 16;
Willful penalties assessed: Amount: $388,119;
Non-willful penalties assessed: Number: 35;
Non-willful penalties assessed: Amount: $1,997,768.
Calendar year: 2009;
Willful penalties assessed: Number: 33;
Willful penalties assessed: Amount: $999,187;
Non-willful penalties assessed: Number: 56;
Non-willful penalties assessed: Amount: $695,759.
Calendar year: Total;
Willful penalties assessed: Number: 527;
Willful penalties assessed: Amount: $16,390,410;
Non-willful penalties assessed: Number: 260;
Non-willful penalties assessed: Amount: $5,177,683.
Source: IRS.
[End of table]
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Deputy Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
April 29, 2011:
Mr. James R. White:
Director, Tax Issues:
Strategic Issues Team:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. White:
Thank you for the opportunity to review your draft report titled,
"Abusive Tax Avoidance Transactions: IRS Needs Better Data to Inform
Decisions about Transactions" (GAO-11-493, Job Code 450772).
We are pleased your report acknowledges the immense challenge of
pursuing Abusive Tax Avoidance Transactions and our continued
vigilance to identify and address them. The IRS agrees that better
data may lead to better decisions about focusing resource allocations
and improve our enforcement efforts for Abusive Tax Avoidance
Transactions.
The enclosed response addresses each of the recommendations separately.
If you have any questions, please contact me, or a member of your
staff may contact Monica Baker, Director, Examination, Small
Business/Self-Employed Division at 202-283-2659.
Sincerely,
Signed by:
Steven T. Miller:
Deputy Commissioner for Services and Enforcement:
Enclosure:
[End of letter]
Enclosure:
GAO Recommendations and IRS Responses to GAO Draft Report Abusive Tax
Avoidance Transactions: IRS Needs Better Data to Inform Decisions
about Transactions:
GA0-11-493:
Recommendation 1:
To focus resources on promoter investigations most likely to stop
abuse, establish a process to ensure that field office staff
consistently apply the recently-created reason codes for closing
investigations without penalties or injunctions, and document how the
results are analyzed and used in decisions on investigations to start.
Comment:
We concur with this recommendation. We will update the Internal
Revenue Manual section 4.32.2, The Abusive Tax Avoidance Transaction
(A TAT) Process, to require the use of reason codes on surveyed and
discontinued investigations. We will regularly review the
documentation prepared by the field to ensure the reason codes for
surveying or discontinuing an investigation are properly applied and
to evaluate whether any of the reasons warrant changes in the
selection of investigations that are sent to the field.
Recommendation 2:
To improve reporting on the results of examinations results on ATAT
issues, require all divisions to supply similar, consistent results
from existing data systems; separately track the tax amounts
recommended, assessed, and collected between ATAT issues and non-ATAT
issues; and establish a process to review the accuracy of examination
data prior to its inclusion in future reports to the Joint Committee on
Taxation.
Comment:
We concur with this recommendation in part. Generally, the IRS uses
our Enforcement Revenue Information System (ERIS) to consistently
report on assessments where the ERIS database can provide the
requested information. We agree that the IRS should ensure that it
uses the same databases and methodologies to prepare public
information. We also agree that tracking tax amounts proposed,
assessed, and collected by issue (rather than by case as is currently
done) might provide valuable information for management, however,
there are resource and capability constraints that must be overcome to
capture information in this way.
The IRS will develop criteria for the consistent use of ERIS and
Examination Return Control System (ERCS) data and for a consistent
methodology in validating data before it is publicly released.
Recommendation 3:
To ensure that Forms 8886 filed with tax returns are also filed with
Office of Tax Shelter Analysis (OTSA), after establishing a new
indicator for paper and electronic tax returns, establish a process to
periodically check whether the filers met their filing obligations
with OTSA.
Comment:
We concur with this recommendation and continue to work towards
establishing a new indicator and matching process to regularly review
whether filers meet their filing obligations with OTSA.
Recommendation 4:
To improve IRS's next study of whether Form 8886 should be filed
electronically, identify how often filers already use computers to
prepare these forms.
Comment:
We concur with this recommendation. We will improve the next Modified
Electronic Filing (MeF) study. It may be beneficial to identify how
often Form 8886, Reportable Transaction Disclosure Statement, filers
already use computers to prepare these forms. The Large Business and
International (LB&I) Division will include this data in our next study
following the 2011 filing year.
Recommendation 5:
To ensure material advisor disclosure forms are filed, investigate why
partnerships and S corporations often did not file a form with OTSA
even though they reported on their tax returns that they filed the
form with IRS or had a requirement to file.
Comment:
We concur with this recommendation and will test mismatches from
partnership and S-Corp filers based on revisions to the Form 1065,
U.S. Return of Partnership Income, in 2008 and Form 1120S, U.S. Income
Tax Return for an S Corporation, in 2010. These form changes should
provide more clarity for taxpayers and/or representatives and may
result in a significant decrease in mismatches.
Recommendation 6:
To correct problems with its review of the completeness of disclosure
forms, ensure that OTSA establishes a new process to review
completeness and monitor its success.
Comment:
We concur that the IRS should formalize procedures for evaluating the
completeness of disclosures and for following up with respect to
incomplete disclosures, as appropriate, balancing resource demands and
the potential for abuse identified in particular deficient disclosures.
SB/SE and LB&I will jointly develop and formalize procedures for
Office of Tax Shelter Analysis (OTSA) and the Abusive Transactions
Support Unit (ATSU) to identify, evaluate, and follow up on incomplete
disclosures, as appropriate. Internal Revenue Manual Section 4.32.2,
Abusive Tax Avoidance Transactions, will be updated as required.
Recommendation 7:
To monitor the timeliness of investor lists receipts, comprehensively
track the elapsed days it takes for material advisors and non-material
advisors to provide the lists to IRS.
Comment:
The information currently contained in individual case files reflects
when information has been requested and received. There are resource
and capability constraints to capturing this information on a
systematic basis that may outweigh the benefits of this additional
information.
Recommendation 8:
To induce non-material advisors to provide investor lists to IRS
within a specified time, take steps such as:
* requiring IRS staff to bring a summons for an investor list to the
first interview with a suspected non-material advisor; and;
* reevaluating the idea of lowering material advisor dollar thresholds.
Comment:
We partially concur with this recommendation. The IRS attempts to
obtain the required information with the least burden to both the
promoter and the IRS. If a records request is not successful, the
agent and manager should consider whether the expenditure of resources
to prepare and enforce the summons is appropriate. Internal Revenue
Manual Section 4.32.2 is being updated and includes a recommendation
that an agent should consider whether a summons should be prepared for
use at an initial meeting. We believe these case-specific decisions
should remain with the agent and manager.
We concur that we should reevaluate whether it would be useful to
lower the material advisor dollar thresholds. As noted by GAO,
however, even with a lower threshold, many promoters still would not
be "material advisors." Moreover, lowering the material advisor
threshold (or imposing penalties for non-material advisors) may not
lead to receipt of investor lists more quickly. Those promoters who
resist the IRS's attempts to obtain information would likely continue
to resist by asserting that they are not promoters, that they do not
meet the dollar criteria, or that they are otherwise not subject to
the relevant law.
The Director, Abusive Transactions and Technical Issues will gather
input from SB/SE Examination field personnel to determine whether it
would be useful to lower the material advisor thresholds and will make
a recommendation to the Director, Examination, SB/SE and Director, Pre-
Filing and Technical Guidance, LB&I.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
James R. White, (202) 512-9110, whitej@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Ralph Block and Thomas Short,
Assistant Directors; Virginia A. Chanley; Laurie C. King; Lawrence M.
Korb; Karen V. O'Conor; Ellen M. Rominger; Lou V. B. Smith; Andrew J.
Stephens; and James J. Ungvarsky made key contributions to this report.
[End of section]
Footnotes:
[1] Based on IRS officials' definition, the term promoter includes a
person who (1) organizes an investment plan or arrangement affecting
taxes or participates in selling it and (2) makes a statement about
its tax benefits. Material advisors include promoters who earn or
expect to earn at least a specified amount from any reportable
transactions, such as $50,000 in gross income when a reportable
transaction provides substantially all the tax benefits to
individuals. To be a material advisor to a transaction, a party must
provide material aid, assistance, or advice with respect to the
organizing, managing, promoting, selling, implementing, insuring, or
carrying out of any reportable transaction.
[2] GAO, Internal Revenue Service: Challenges Remain in Combating
Abusive Tax Schemes, [hyperlink,
http://www.gao.gov/products/GAO-04-50] (Washington, D.C.: Nov. 19,
2003).
[3] GAO, Internal Revenue Service: Challenges Remain in Combating
Abusive Tax Shelters, [hyperlink,
http://www.gao.gov/products/GAO-04-104T] (Washington, D.C.: Oct. 21,
2003).
[4] Pub. L. No. 108-357, §§ 811-822, 118 Stat. 1418, 1575-1587 (Oct.
22, 2004).
[5] IRS has investigated promoters to stop ATATs, examined the tax
returns of investors in ATATs, and initiated settlements with
taxpayers using ATATs.
[6] Internal Revenue Service, Forecasting Potential Abusive Tax
Avoidance Transaction Promoters and Participants, June 2006.
[7] On October 1, 2010, IRS created LB&I from the former Large and Mid-
Size Business (LMSB) division. For ease of presentation, this report
uses the term LB&I to include actions taken by LB&I or LMSB. LB&I
serves the following taxpayers: corporations, subchapter S
corporations, and partnerships with assets greater than $10 million,
and certain high-wealth individuals.
[8] GAO, Tax Gap: IRS Can Improve Efforts to Address Tax Evasion by
Networks of Businesses and Related Entities, [hyperlink,
http://www.gao.gov/products/GAO-10-968] (Washington, D.C.: Sept. 24,
2010).
[9] 26 U.S.C. § 469.
[10] 26 U.S.C. §§ 6112, 6708. For this report, references to the
responsibilities and authority of the Secretary of the Treasury are
treated as being delegated to IRS unless otherwise noted.
[11] 26 U.S.C. § 6111; 26 C.F.R. § 1.6011-4.
[12] This committee is a major ATAT mechanism designed to provide
leadership, coordination, and policy for addressing ATATs. It meets
about monthly, sharing information across IRS and monitoring cross-
cutting issues. Agenda items have included material advisors; emerging
ATAT issues; and issue management teams, which are to gather
information and develop a strategy for specific ATATs.
[13] Internal Revenue Service, Forecasting Potential Abusive Tax
Avoidance Transaction Promoters and Participants (June 2006). IRS used
many methods for its various estimates. For example, it used a
quantitative CHAID/logistic process for tax year 2001 to determine the
probability that taxpayers were involved in ATATs based on how closely
they resembled known ATAT participants. For tax year 2004, it used the
qualitative Nominal Group Technique. It also developed a model using
IRS audit data to predict the change in the size of the promoter and
participant population over time. Finally, it developed ideas using
quantitative and qualitative approaches for tracking systems to assess
the impact of enforcement on the population of potential promoters and
participants over time.
[14] 26 U.S.C. § 36. Under current law, the credit is available to
eligible homebuyers in 2008, 2009, and 2010.
[15] See [hyperlink, http://www.gao.gov/products/GAO-10-968]. We
recommended and IRS agreed to develop a strategy that coordinated the
various network tax evasion efforts. Without this strategy, IRS risked
making redundant investments or failing to concentrate investments on
the programs and tools with the greatest potential.
[16] Table 1 excludes LB&I because it started fewer promoter
investigations after 2006. An OTSA official said that the earlier
investigations had dealt with major promoter firms. For example, at
the end of 2006, LB&I had over 200 ongoing investigations. For 2007
through 2009, LB&I approved 20 new investigations.
[17] IRS revenue agents examine taxpayer tax returns to determine the
correct tax liability, and revenue officers collect delinquent taxes.
[18] Fiscal years 2006 through 2008 also had significantly more closed
through discontinuances than surveys.
[19] Examinations of complex tax returns can involve more than one tax
issue--such as ATATs--and the examination data systems do not split
out ATATs' portion of the recommended additional tax amount.
[20] SB/SE's database originally recorded 56 percent. IRS later
removed some non-abusive cases for 2007 that its records had
improperly included. We conservatively assumed all of the reduction
also reduced the amount contested by taxpayers, which reduced the 56
percent to 54 percent. According to an IRS official, the same issue
existed for 2006. However, because the amount of change for 2006 was
not readily available, we assumed the amount was immaterial to the 5-
year totals, just as it was for 2007.
[21] In March 2011, an IRS official told us about a research project
showing 2007 and 2008 collections from taxpayers who were involved
with ATATs. These collections resulted from examinations that could
have been closed before 2007 and 2008 for tax returns filed in earlier
tax years. The project did not break out how much of the collected
amounts came from ATAT versus non-ATAT issues.
[22] For instance, taxpayers initially chose to participate but
eventually did not pursue settlement.
[23] For the 17 ATAT initiatives, 13 were completed or almost
completed as of early 2010 when IRS collected information for the
Joint Committee.
[24] Internal Revenue Service, Office of Tax Shelter Analysis,
Viability of Mandatory E-File for Taxpayers Who File Form 8886
(Washington, D.C.: July 7, 2008; Dec. 1, 2009; and Oct. 4, 2010).
[25] IRS created Form 8918 to replace Form 8264 in 2007, during which
IRS received many of each type of form. See appendix II for the number
of disclosures received from 2003 through 2009.
[26] The forms on which individual sole proprietors and C corporations
filed their tax returns with IRS did not have questions about material
advisors.
[27] These reviewed Forms 8886 were characterized by OTSA as high
risk. All high-risk forms were to be reviewed to verify the
completeness of every item.
[28] Promoters do not meet the material advisor criteria if the
transactions are not reportable transactions or if they fall below the
material advisor income thresholds.
[29] The purposes for which IRS may issue a summons include
determining a tax liability or a tax return's correctness. These
purposes include inquiring into offenses connected with the
administration or enforcement of the internal revenue laws. 26 U.S.C.
§ 7602.
[30] Statutes of limitations generally limit the time IRS has to make
tax assessments to within 3 years after a return is due or filed,
whichever is later. The statute of limitations can be extended to 6
years when taxpayers substantially omit items, such as additional
gross income from their returns. In cases of false or fraudulent
returns, willful attempts to evade taxes, or no returns being filed,
no statute of limitations exists. 26 U.S.C. § 6501.
[31] The concerns involved potential legal challenges in extending the
statute if IRS already possessed the information on a transaction. As
for the extension, if a taxpayer fails to disclose a listed
transaction, the statute of limitations on any assessment will not end
until at least one year from the earlier of when the listed
transaction is disclosed by the taxpayer or the material advisor
provides a list of investors to IRS including that taxpayer. 26 U.S.C.
§ 6501(c)(10). For more information, see appendix II.
[32] Material advisors are required to provide investor lists to IRS
if their gross income from promoting a non-listed reportable
transaction exceeds $250,000 or $50,000 if substantially all tax
benefits are provided to individuals; the thresholds for listed
transactions are generally lowered to $25,000 and $10,000,
respectively. 26 U.S.C. § 6111(b); 26 C.F.R. § 301.6111-3(b)(3).
[33] See appendix II for AJCA provisions on abusive transactions and
related statistics on the penalties. Our work did not assess whether
the number or amount of AJCA penalty assessments was appropriate.
[34] The other provision amended a penalty for failing to report an
interest in foreign financial accounts. 31 U.S.C. § 5321.
[35] The previously existing penalty provision is IRC section 6662.
[36] Pub. L. No. 111-240, § 2041 124 Stat. 2504, 2560 (Sept. 27, 2010).
[37] S corporations provide limited liability to their owners and pass
through gains and losses to the owners' tax returns without generally
paying taxes at the corporate level.
[38] GAO, Home Mortgage Interest Deduction: Despite Challenges
Presented by Complex Tax Rules, IRS Could Enhance Enforcement and
Guidance, [hyperlink, http://www.gao.gov/products/GAO-09-769]
(Washington, D.C.: July 29, 2009); GAO, Tax Compliance: Inflation Has
Significantly Decreased the Real Value of Some Penalties, [hyperlink,
http://www.gao.gov/products/GAO-07-1062] (Washington, D.C.: Aug. 23,
2007); and GAO, Tax Administration: Comparison of the Reported Tax
Liabilities of Foreign-and U.S.-Controlled Corporations, 1985-2005,
[hyperlink, http://www.gao.gov/products/GAO-08-957] (Washington, D.C.:
July 24, 2008).
[39] Pub. L. No. 108-357, §§ 811-822, 118 Stat. 1418, 1575-1587 (Oct.
22, 2004).
[40] The understatement penalty generally is abated in cases in which
the taxpayer can demonstrate reasonable cause for the underpayment and
good faith action. IRS officials also said penalties can be abated for
other reasons such as penalty assessment posting errors or changes in
the outcome of cases that are appealed or adjudicated in tax court.
[41] According to OTSA officials, the Large Business and International
division rarely issues injunctions because it deals with material
advisors who are involved with transactions that, while they may be
abusive, are not illegal.
[End of section]
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