A basic, simple starting point is probably the fact that no person or entity savors paying taxes beyond what he or she is legally required to pay. As such, wealthy individuals and entities began to develop and improve various means to reduce the amount of tax one is liable to pay. Within the modern tax era, the development of tax avoidance strategies that sometimes cross the line to tax evasion started with the personal tax shelters of the 1970s and 1980s. Congress responded to individual tax shelters by passing the Tax Reform Act of 1986 that included the passive activity loss rules of IRC § 469, limited deductions for nonbusiness expenses, and extended the at-risk rules affecting real property.
The second wave of the growth of tax shelters involved the growth of corporate tax shelters throughout the 1990s and first decade of the 2000s. Utilizing methods and procedures, like the now notorious double Irish with a Dutch sandwich, corporations shifted income to low-tax jurisdictions while also generating business losses to offset taxable income further. These two trends resulted in a growing “tax gap” that Congress has attempted to combat through increasingly aggressive laws and regulations.
Tax Shelter Registration and List Keeping Requirements
In the 1980s, tax shelter detection and enforcement efforts were still in their infancy. As such, in 1984, Congress enacted once of the first tax shelter registration and disclosure laws to remedy the dearth of information the agency had at the time. Essentially, the law required the registration of tax shelters, identification of tax shelter promoters, for organizers to provide a tax shelter identification number to investors, and investors were required to report this information individually.
The next major step in tax shelter regulation came in 1997 when Congress passed a law requiring certain arrangements and entities to be as a tax shelter for registration purposes. This obligation was modified subsequently in 2004 with the passage of the American Jobs Creation Act (AJCA). As modified by AJCA, the registration and list-keeping requirements were jettisoned in favor of reportable transaction disclosure and list keeping requirements that apply to material advisors. Finally, in 2000, the IRS published Announcement 2000-12, Disclosure Requirements for Corporate Tax Shelters. This announcement’s framework roughly approximates the current regulatory regime for disclosing reportable transactions. The Announcement also was the first step in the founding of the Office of Tax Shelter Analysis (OTSA) which was intended to act as a clearinghouse for all tax shelter information.
What Tax Shelter Provisions Require Action by Taxpayers and Advisors?
Under the AJCA, all material advisors to a reportable transaction have a duty to make certain disclosures. The AJCA imposes a penalty for any material advisor who fails to keep and maintain a list of investors into the entity or fund. The law also imposes a penalty for any material advisor who fails to disclose a reportable transaction.
Individual taxpayers and businesses can also face penalties for improper handling of tax shelter reportable transactions. IRC § 6011 provides that a taxpayer is obligated to disclose their role in any reportable transaction. The failure to satisfy this obligation can trigger a penalty under § 6707A. Under § 6707A, as amended by the Small Business Jobs Act of 2010, a penalty proportionate to the loss of tax revenue attributed to the unreported transaction can be imposed.
Public entities are also subject to penalties under § 6707A due to violations of the AJCA. If a public entity is assessed a penalty under these laws, the public entity is required to disclose that a penalty has been imposed by the Securities & Exchange Commission (SEC). The failure to disclose this penalty in SEC filings can itself be treated as a subsequent failure to disclose a listed transaction.
Accuracy-Related Penalties and the Possibility of a Criminal Tax Prosecution
Section 6662A sets forth an accuracy-related penalty that can be imposed for Listed Transactions and Reportable Avoidance Transactions. The AJCA implemented a penalty applicable to accuracy-related errors concerning listed transactions and reportable transactions with a significant tax avoidance purpose. If the penalty applies, it is assessed at 20% unless the penalty is subject to mitigating or exacerbating factors. If the taxpayer can meet a reasonable cause exception, the penalty can be waived. However, if the non-compliance also involved a violation of Reg. § 1.6011-4, an increased 30% penalty will apply and relief through the reasonable cause exception is unavailable
In situations where a taxpayer appears to avoided tax reporting obligations for tax shelters, an array of additional penalties can apply. If the accounts or entities are foreign, additional penalties for violation of FATCA and FinCEN FBAR disclosures could apply. Furthermore, in instances where it appears that the taxpayer intentionally or willingly avoided the assessment or payment of tax, criminal tax evasion charges could be advanced. Under Section 7201, a prison sentence of up to five years and financial penalties can apply.
Work with a Strategic Tax Lawyer
If you have concerns regarding tax shelters, foreign accounts, reportable transactions, or other tax issues the tax lawyers and CPA of the Tax Law Offices of David W. Klasing may be able to help. Founding attorney David Klasing is a dually certified tax attorney and CPA. To schedule a confidential, reduced-rate consultation call our firm at 800-681-1295 or online today.
