NCPA - National Center for Policy Analysis

IRS Seeks Sweeping Powers To Foil Tax-Shelter Users

June 4, 1999

Given the complex and torturous U.S. tax code, corporate tax accountants and lawyers search out and sometimes find ways to shelter profits from the Internal Revenue Service. At present, the IRS detects such attempts primarily by stumbling on them haphazardly. The Clinton administration doesn't like that and is requesting that Congress give the agency broad new powers to discourage businesses from using shelters -- including even those which are perfectly legitimate.

For example, some corporations are using a new and increasingly popular tax avoidance strategy known as a "liquidating REIT," or Real Estate Investment Trust. The IRS only became aware of it after noting an obscure reference in a corporate financial statement, followed by a phone call from a tax professional who described it to Treasury officials.

It took analysts at Treasury and the IRS some months to figure it out. Then they convinced Congress that use of the strategy abused the tax code. Finally, a provision to shut down such shelters was included in the tax bill signed into law in October.

Seemingly on the assumption that corporations are doing something that must be wrong, even though officials can't figure out what that might be, the Clinton administration is asking Congress for broad new powers to make using a questionable shelter sufficiently risky and costly so that corporations won't use them.

  • The administration's plan would allow the IRS to deny tax benefits generated by transactions it judges are driven primarily by tax-avoidance considerations.
  • It would double -- to 40 percent -- the penalty imposed on corporations found to have understated their tax bill by using an improper tax shelter, and make it harder for companies to contend they thought the shelter was allowable.
  • It would deny deductions for the cost of tax advice that led to use of a tax shelter and impose excise taxes on any fees earned by accountants and lawyers in developing shelters for corporate clients, as well as on the purchaser of a shelter.
  • Perhaps most important, it would give the government considerable leeway in determining what separates a permissible tax strategy from one that steps over the line -- a divide that tax professionals say current law leaves maddeningly vague.

Source: Richard W. Stevenson, "Taxing the Treasury's Patience," New York Times, June 4, 1999.

 

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