US Senate Finance Committee Releases Tax Shelter Bill

by Mike Godfrey, Tax-News.com, Washington

08 August 2001

Hot on the heels of the new anti-money laundering proposal comes another piece of draft legislation, also backed by Republican senator Chuck Grassley, but this time clamping down on abusive tax shelters. However, the draft intends to curb the use of such vehicles by encouraging greater disclosure rather than introducing new penalties, its progenitors revealed.

The bipartisan bill, which is the brainchild of Senator Grassley and Democratic Senate Finance Committee chairman Max Baucus proposes the boosting of the taxpayer penalty for understatement of taxes from 20% to 40%, in common with many other tax shelter proposals. However, it differs in the sense that the tougher penalty would not apply if the transaction is disclosed to the IRS, if there is substantial legal authority for it, and if the taxpayer believes that he has a better than 50-50 chance of prevailing if challenged.

The criterion established for 'reasonable belief' under the terms of the legislation is the opinion of an independent tax advisor. The draft states that the taxpayer may not avoid the 40% penalty if reliant on the opinion of a tax advisor who has a financial interest in the transaction, or who is otherwise involved in the potentially abusive tax shelter.

The senators issued a joint statement shortly after the draft bill was launched, in which they stated their concern over the widespread use of the contested vehicles, and emphasized the need for increased disclosure. 'We remain concerned that taxpayers continue to use abusive tax shelter transactions to avoid paying taxes they properly owe,' they said in the statement. However, there is clearly a desire to strike the right balance, and there was a note of reassurance for the business community, as they added: 'We are equally concerned, however, that any legislative proposal not be overly broad so as to impede legitimate business transactions.'

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