IRS Investigating Potential Municipal Bond Abuses

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

06 February 2004

In its ongoing fight to close down abusive tax shelters, it has emerged that the IRS is carrying out investigations into several law firms on suspicion of tax abuses involving municipal bonds.

In an interview with the Wall Street Journal, Mark Scott, director of the IRS tax-exempt bond division, revealed that there are “four or five” so-called ‘Section 6700’ cases being dealt with by the Revenue at the present time.

Section 6700 refers to the section of the tax code that deals with penalties for promoters of illegal tax shelters. The latest crop of cases represents a relatively new development in the government’s fight against tax shelter abuse, with attention now focusing on market professionals who could be subject to such penalties for certifying non-compliant municipal bond transactions.

In particular, the authorities want to crack down on the practice of ‘opinion shopping’, whereby lawyers certify that a muni transaction is legal and entitled to tax-exempt status, despite the fact that the transaction breaks tax shelter rules.

According to the WSJ, Mr Scott believes a contributory factor is that law firms often accept at face value assurances from financial institutions that a transaction is sound without delving any deeper.

Nevertheless, Scott accepted that the vast majority of law firms with municipal bond practices are carrying out their duties perfectly legally and are fully aware of their obligations, both to the taxman and their clients.

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