American Bar Association Calls For Revisions To Senate Tax Relief Bill

by Leroy Baker, Tax-News.com, New York

06 January 2006

In a letter to members of the Senate Finance Committee, the American Bar Association's Section of Taxation has repeated its opposition to certain sections of the Tax Relief Act 2005 relating to the economic substance doctrine, offers in compromise and frivolous tax submissions.

Two sections of the proposed legislation attempt to codify the economic substance doctrine while also adding a penalty for understatements attributable to transactions lacking economic substance. However, according to the ABA Section of Taxation Chair, Dennis B. Drapkin, these provisions, while well intended, would have "significant ramifications" for legitimate business transactions, while the addition of a separate penalty scheme would create "unnecessary complexity and confusion".

"We continue to believe that a 40-percent penalty is too high, is likely to be administered inconsistently by the IRS and may affect a court’s decision as to whether to apply the economic substance doctrine in a given case," Mr Drapkin stated.

The letter went on to express "serious concerns" about another section of the Bill which proposes adding a non-refundable 20% down payment requirement to lump-sum offers-in-compromise to be retained by the IRS if the offer is rejected. Mr Drapkin argued that such a requirement could dramatically reduce available outside funding for potential offers and pose a "significant risk" of a reduction in the number of legitimate offers submitted, as well as in the number of individuals reentering the tax system.

The letter also expressed opposition to a section of the Bill which would create two different categories of “specified frivolous submissions” in addition to increasing the penalty for filing frivolous returns from $500 to $5,000. The revisions also allow the IRS to block court review of its decisions regarding frivolous submissions.

"By authorizing the IRS both to assess a substantial penalty and to disregard requests for CDP (collection due process) hearings, the proposal may eliminate one of the most important innovations of the 1998 Taxpayer Bill of Rights: the ability to petition the Tax Court where the IRS has failed to follow proper collections procedures," the letter stated.

With the threat of a $5,000 fine for filing a frivolous return, these measures would be particularly effective at dissuading low income taxpayers to petition the Tax Court in the event that the IRS fails to follow proper collection procedures, Mr Drapkin's letter warned.

The ABA Tax Section urged Senators to defer this part of the bill, and called on the Treasury Inspector General for Tax Administration to evaluate the current laws and procedures to deal with frivolous submissions.

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