IRS Global Settlement Initiative Deadline Approaches

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

17 January 2006

The Internal Revenue Service has warned taxpayers that there will be no extension to the January 23 global settlement program deadline, under which taxpayers are given the opportunity to settle civil tax disputes involving certain transactions deemed abusive by the agency.

According to the IRS, the settlement initiative allows taxpayers the opportunity to quickly and efficiently close out a wide range of abusive transactions.

“This is a last-chance opportunity for taxpayers to put these deals behind them,” commented IRS Commissioner Mark W. Everson.

The settlement program covers 21 transactions consisting of both listed and non-listed transactions. With the exception of applicable penalties, which vary depending on the level of abusiveness, the settlement terms are identical for all 21 transactions.

The transactions can be divided into three groups:

• Group 1—Six Listed Transactions.
• Group 2—Ten Listed Transactions.
• Group 3—Five Other Transactions.

Groups 1 and 2 include 16 of the current 31 abusive transactions listed by the IRS. The only difference between the groups is the penalty level required to participate. The remaining 15 listed transactions are excluded from the Settlement for a variety of reasons, such as: the IRS has previously done a settlement initiative on the transaction; or the listed transaction is dormant and all cases are closed.

Group 3 covers five transactions that the IRS is concerned about but which have not been formally listed. Notices have been issued regarding intellectual property transfers to charities and conservation easements advising taxpayers that, depending on the format and structure of the transaction, in appropriate cases the IRS will challenge these transactions.

Under the Settlement Initiative, the taxpayer must concede 100% of the transaction's tax benefits. The taxpayer will be allowed to treat as an ordinary loss the full transaction costs claimed on the tax return, including promoter and professional fees. A penalty of a quarter of the maximum applicable penalty (which in most cases would be 20% of the tax, but in certain cases would be 40%) will be paid on Group 2 and 3 transactions. For Group 1 transactions, the penalty will be half of the maximum.

No penalty will be due if the taxpayer made a voluntary disclosure under a program announced in 2002 or if they received a tax opinion letter that was not part of a package sold by a tax promoter, but was given by a tax adviser meeting certain tests.

The recently passed provision in the Gulf Opportunity Zone Act of 2005 modified the rules for calculating interest on tax deficiencies of individual taxpayers. Congress changed the law to assess interest continuously on additional taxes involving abusive tax shelter transactions starting with the filing of the tax return up to the time the taxes are settled and paid. Before the Act, interest was generally suspended for the period beginning 18 months after the filing of the tax return until Oct. 3, 2004.

The new law, however, carves out from this added interest charge any transaction that taxpayers choose to close out as a part of the global settlement initiative. This incentive is a one-time exception and will be available only for those that come forward with their election by Jan. 23, 2006 and subsequently resolve the issue by a closing agreement with the IRS.

Taxpayers who bypass the settlement initiative and go to Appeals will not qualify for this exception but will incur the full interest charge on their tax deficiencies.

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