IRS Reveals Minimal Corporate Compliance Over Tax Shelters

by Mike Godfrey, Tax-News.com, Washington

04 March 2002

According to figures recently released by the US Internal Revenue Service, corporate compliance over the use of tax shelters has been very poor, with many fewer businesses than expected revealing the mechanisms by which they shield their income from taxes.

Following the announcement of a crackdown on abusive tax shelters two years ago, thousands of US businesses were expected to come forward. However, according to David Harris, the Manager of the IRS's Office of Tax Shelter Analysis, during that period only around 100 companies came forward to disclose information on around 325 transactions.

An amnesty on the imposition of penalties for corporations using abusive tax shelters, which will run until April 23, has prompted some 52 additional disclosures, but the results are still far from spectacular.

Although companies in the US do not face monetary penalties for failing to disclose the use of tax shelters, if they are later caught out by the IRS, the revenue authority could allege that the company acted in bad faith, and subject it to additional penalties for violations uncovered during a tax audit.

However, several recent court defeats by the IRS in tax shelter cases have left the business sector with the impression that the crackdown is somewhat toothless, and many choose to protect themselves with opinion letters from lawyers stating that the transaction is legally valid, and then forget about the matter completely.

The use (and abuse) of tax shelters has come under a great deal more scrutiny since the collapse of Enron and the revelations of the energy trading giant's 'creative' accounting practices, and the now notorious company is said to be considering taking advantage of the IRS amnesty itself.

Speaking to the Washington Post on Friday, Senator Charles Grassley, the senior Republican on the Senate Finance Committee which is attempting to unravel Enron's tax affairs, expressed his surprise at the IRS's findings, given the current climate on transparency issues:

'I'm kind of shocked that the level of corporate compliance is still very minimal,' he commented. 'It's very surprising.'

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