On Dec. 21, 2001, the IRS started the 120-day "window of opportunity" for taxpayers to voluntarily come forward and disclose tax shelters and other questionable items reported on their tax returns. Since then, the IRS said 21 taxpayers have disclosed more than $1 billion in claimed losses. (See IRS Takes New Steps to Encourage Tax Shelter Disclosure.)

 

"We are at a stage right now where corporate tax shelters are a really big focus. They were in the Clinton administration, and they are now with this treasury because there's a concern the government's losing a lot of revenue from some very clever tax practitioners," Janice Johnson, Managing Director of the Financial Services Group at American Express Tax and Business Services, told FMN Online.

 

In fact, the IRS recently announced it will waive the accuracy-related penalty for underpayments of tax. This initiative applies when a business discloses tax shelters and other questionable transactions before April 23, 2002, or the date the transaction is raised during an examination. If the business cooperates, said Johnson, it will avoid any penalties under Code §6662.

 

Johnson said the decision then becomes one for the taxpayer of whether or not to disclose a tax shelter to the IRS Office of Tax Shelters, which will examine the transaction and decide if there is a problem with it.

 

"Does it make sense for me to make the disclosure before the IRS comes after me? That's a real tough dilemma for taxpayers. What do you do in this situation? There's no clear-cut answer here. Part of the way we've always tried to practice tax law is that if you're going to do something, you do it kind of quietly. You dot your i's. You cross your t's. You get your legal opinion, and you don't go out and market it to the next 99 people. If you're engaged in these transactions where that marketing is taking place, even if you don't disclose, it's likely they're going to get to you."

 

Johnson said the IRS has listed transactions that are "bad" in the regulations, such as onshore-offshore basis type transactions.

 

"This is your chance to get on record that you were one of the investors. So, if you are audited on it, if it is looked at, you will, in fact, get out of the penalties," she said.

 

Johnson predicted that congressional action on the issue anytime soon will be slow due to the administration's priority list, which is topped by terrorism and deficits.

 

"Unless they start being convinced that this is a way to really raise revenue and decrease the budget gap, or if, somehow, the IRS and the Treasury manage to convince Congress that this is a real revenue raiser, you might see some legislation. I doubt that they're going to be persuasive in that area so it's not likely you're going to see legislative solutions," she said.

 

But in the end, Johnson noted, "every time Congress legislates in this tax area and issues very specific rules, taxpayers get more specific at working around those rules."

 

Though since 1986 the IRS has pursued tax preparers and promoters rather than corporations for illegitimate tax shelters, both the Clinton and Bush administration have focused more attention on holding corporations liable.

 

"I think it's getting to be much more the case that the business community is on the hook more than the preparer," said Johnson. "One of the things to keep in mind is we're seeing a lot of the big CPA firms and big law firms much more actively promoting these kinds of shelter activities than we ever saw in the past. Generally, it was Joe Shmoe out here who came up with an idea, and he was the promoter, and that was it. Now you're seeing the big firms actually engaging in and promoting activities."

 

On the heels of the Enron debacle, Johnson warned businesses to be careful that the accounting methods they're using are proper.

 

"They need to go back and re-evaluate what they are doing, particularly if none of their advisors have changed. Everybody does get kind of comfortable with the way a particular company does business."

 

 

This article is adapted from Tax Shelters: Three Part Disharmony Currently Deducting Next Year's Expenses. The program is available for CPE credits through FMN Online. 

 

The remainder of the program covers the following topics: