Senate Hearings Will Investigate Corporate Tax Sheltering

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

12 November 2003

Next week in Washington, the Senate's Permanent Subcommittee on Investigations will hold two days of hearings that will “peel back the curtain” on the creation and sale of abusive tax shelters, the committee’s ranking Democrat, Carl Levin announced on Monday.

The hearings have been earmarked for sittings on Tuesday and Thursday next week, and the Michigan Democrat announced that: “We are determined to do everything we can to expose, condemn, and stop the unethical and illegal conduct involved in the peddling of abusive tax shelters.”

Levin has been a particularly outspoken critic of the recent activities of certain corporations caught up in financial and accounting scandals, most notably Enron. In a speech to the Citizens Crime Commission in New York this week, Levin told the audience “the fact is that the mass marketing of abusive tax shelters by respected accounting firms, law firms, banks, and investment advisers who are hawking these so-called "tax products" to thousands of people like late-night, cut-rate T.V. bargains, is surely scandalous, just as Enron was scandalous.”

“These products are so dubious that some of their developers even had clients take out insurance policies in case the IRS caught up with them!,” the Senator added, continuing: “And they are doing it in exchange for hundreds of millions of dollars in fees and other compensation, some of it contingent, while robbing the U.S. Treasury of billions of dollars in revenues each year.”

Quoting figures from the General Accounting Office, Levin said an IRS database tracking unresolved and abusive tax shelter cases in recent years has recorded potential tax losses of $85 billion. Levin told the conference that the GAO also reports the IRS has identified almost 300 firms that appear to have promoted abusive tax shelters and other abusive tax products.

Levin has made a number of recommendations on what action needs to be taken to curb the selling of abusive tax shelters.

“First, we need to tighten the law on what is known as the "economic substance" test. This test involves examining whether, from an objective standpoint, the transaction had a business purpose and was intended to produce economic benefits aside from a tax deduction.

“Second, we need to increase the penalties on those who produce and peddle illegal tax shelters. The current penalties are a joke. $1,000 for promoting an illegal tax shelter, $1,000 for aiding and abetting another person's tax evasion.

“Third, we need to get rid of the conflicts of interest that are so rife in this area. Last month I introduced S. 1767, with the co-sponsorship of Senator McCain and Senator Baucus, to end the conflicts of interest that now arise when an accounting firm sells a tax shelter to an audit client and then audits that client's financial statements - in effect auditing its own work.

“Fourth, we need to increase enforcement dollars for the IRS so they can go after these abuses. Every dollar invested in tax enforcement is returned many times over to the Treasury.

Senator Levin also recommended that the chief enforcement and investigative bodies such as the IRS, the SEC, the Public Company Accounting Oversight Board and the banking regulators liaise more closely in order to clamp down on the marketing of abusive tax shelters.

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