US Treasury Announces Plans To Close Tax Shelter Loopholes

Mike Godfrey, Tax-news.com, New York

12 January 2001

The US Treasury Department has come up with new regulations this week in an attempt to deter companies and individuals from taking advantage of an existing loophole in the US law enabling them to profit from abusive corporate tax shelters. Known as Circular 230, the rules would be revised to include stricter requirements for rendering tax shelter opinions.

At this stage the new rules are in draft form but if implemented they will enforce the payment of penalties and ensure that lawyers suspected of violating US tax laws are subject to disciplinary action. This may result in a public reprimand or temporary (and in severe cases - permanent) suspension from practicing before the IRS. Under the proposed rules the senior tax partner in legal and accounting firms across the US would become responsible for monitoring tax practioners' activities and establishing guidelines.

A Treasury statement explains: 'The new rules would strengthen the standards regarding factual due diligence and legal analysis. In particular, they would help ensure that practitioners analyze and address carefully whether a particular transaction has a legitimate business reason and is not being done solely for the tax benefits, and that they consider and analyze all potentially relevant judicial doctrines and anti-abuse rules.'

Details of just how easy it was for companies to benefit from tax shelters were widely reported in the US press last month. Many tax advisors were discovered to have created shelters for companies to shield their cash; but instead of charging for their services by the hour, the usual form of billing, they took a cut of the tax savings that the companies accrued. The large of amounts of money that could be earned by these activities was a key reason for the upsurge in the growth of abusive tax schemes, which was when alarm bells started ringing for the IRS.

In a press release, Treasury Secretary Lawrence H. Summers said: 'Abusive tax shelters are the most serious compliance problem in the U.S. tax system, these proposed measures would deter the purveyance of these shelters, protect the integrity of our tax system, and ultimately reduce the tax burdens of honest taxpayers.'

In addition to the proposed new rules for advisers the Treasury Department has also issued regulations requiring the reporting and registration of tax shelters. In some cases the department has shut down tax shelter transactions and there is further legislation under consideration to halt the marketing and promotion of shelters. Finally, it its battle against abusive tax shelter activities, the IRS has stepped-up its efforts to curb abusive trusts based in tax havens, and has created an Office of Tax Shelter Analysis to coordinate its anti-shelter activities.

Here is the text of the Treasury's Press Release dated 10th January 2001:

TREASURY TO PROPOSE REVISED STANDARDS OF
PRACTICE FOR TAX PRACTITIONERS

The Treasury Department on Thursday will issue proposed regulations that would modernize the standards of practice for attorneys, accountants, and others who practice before the Internal Revenue Service. These standards, known as Circular 230, would be revised to include stricter requirements for rendering tax shelter opinions.

"Abusive tax shelters are the most serious compliance problem in the U.S. tax system," Treasury Secretary Lawrence H. Summers said. "These proposed measures would deter the purveyance of these shelters, protect the integrity of our tax system, and ultimately reduce the tax burdens of honest taxpayers."

The proposed regulations would modify existing standards of practice. In particular, the proposed regulations would revise standards for opinions rendered by tax practitioners regarding tax shelter transactions. These opinions give prospective investors an assurance that the purported tax benefit of a shelter is likely to be sustained if challenged by the IRS and may be offered in an effort to provide a potential investor comfort that penalties will not be imposed if the transaction is successfully challenged.

The new rules would strengthen the standards regarding factual due diligence and legal analysis. In particular, they would help ensure that practitioners analyze and address carefully whether a particular transaction has a legitimate business reason and is not being done solely for the tax benefits, and that they consider and analyze all potentially relevant judicial doctrines and anti-abuse rules. In addition, the proposed regulations would:

prohibit certain contingent fee arrangements where the practitioner's fee is based on the tax benefit being sustained;
require that practitioners in firms who have responsibility for a firm's tax practice take reasonable steps to put in place adequate procedures to ensure compliance with the Circular 230 standards; and,
authorize the IRS to issue a public reprimand, or censure, in cases warranting a sanction less severe than suspension or disbarment.

Secretary Summers announced last February that the Circular 230 opinion standards would be revised to complement Treasury Department and IRS efforts to combat the proliferation of abusive tax shelters. The proposed regulations were completed following a period of public comment and input from the tax practitioner community, including the American Bar Association, the New York State Bar Association, and the American Institute of Certified Public Accountants. A public hearing on the proposed regulations is scheduled for May 2, 2001. The regulations will take effect only upon publication in final form in the Federal Register.

The Treasury Department has also issued regulations requiring the reporting and registration of tax shelters, shut down many tax shelter transactions that have come to Treasury's attention, and proposed legislation to further halt the marketing and promotion of shelters. In addition, the IRS has created an Office of Tax Shelter Analysis to coordinate its anti-shelter activities and stepped up its efforts to curb abusive trusts based in tax havens.

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