New Rules for Tax Shelters

Article excerpt

While most taxpayers voluntarily comply with federal tax laws and pay their fair share, there are serious tax compliance problems.

Lately, the Internal Revenue Service has been beefing up its efforts to curb abusive tax shelters and shut down the promoters of those schemes.

As part of its efforts, the IRS recently revised its tax shelter disclosure regulations. The new regulations, like the ones they replace, generally require taxpayers to disclose questionable tax avoidance transactions on their tax returns. That way, the IRS gets a "heads up" about potentially abusive tax shelters and can shut them down.

Under Internal Revenue Code section 6011, taxpayers are required to file tax returns and whatever forms and statements IRS regulations require. Pertinent here, participants in potentially abusive tax shelters are required to file a Form 8886, "Reportable Transaction Disclosure Statement." Similarly, under sections 6111 and 6112, tax shelter promoters are required to register potentially abusive tax shelters and maintain lists of the participants in those shelters. These rules are intended to provide the IRS with the information that it needs to evaluate potentially abusive transactions.

The new regulations revise the categories of questionable tax transactions that must be disclosed on a taxpayer's return. (See Treasury Regulations section 1.6011-4T, issued Oct. 15.)

Starting in 2003, taxpayers and tax shelter promoters will have to report six categories of transactions -- listed transactions, confidential transactions, transactions with contractual protection, loss transactions, transactions with a significant book-tax difference and transactions involving a brief asset holding period.

If a business or individual buys into one of these transactions, it needs to tell the IRS about it on its next tax return, and the promoter needs to tell the IRS about the offering and keep a list of who bought into it.

First, a "listed transaction" is a transaction that is the same or "substantially similar to" any transaction that the IRS has determined is abusive and so identified in a notice or other publication. Presumably, the IRS will know it when they see it, and the IRS has already identified more than a dozen types of abusive transactions. …