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The IRS continues to pursue abusive tax shelters in an effort to curtail their use. Tax shelters are considered transactions that have significant tax benefits, but little or no business purpose, says tax attorney Marc D. Teitelbaum, a partner in the New York City office of law firm Sonnenschein Nath & Rosenthal.
In the most recent crackdown, the IRS announced two significant changes. First, it issued temporary regulations that expanded the disclosure requirements on strategies that provide significant tax benefits. The disclosure requirements no longer apply just to corporations but now individuals, partnerships and trusts must provide this tax strategy information on tax returns. That requirement is effective for transactions entered into in 2001 and thereafter unless the transaction was reported on a return filed prior to June 15, 2002.
As a result of this change, "accountants and business advisers will be less likely to advise their clients to go forward with anything that appears to be a tax shelter," says Teitelbaum.
In the second development, any company or accountant who files a return after June 30, 2002 that claims a tax benefit from an IRS "listed transaction" must turn over any sensitive internal work papers. The IRS expects to use those documents as a road map to help it find other questionable tax strategies. "Listed transactions" are tax shelters that the Treasury Department has singled out as abusive. After disclosing those listed transactions on the tax return, companies now must provide the internal papers, which often describe the accountants' assessment of questionable tax positions.
While the IRS has had the authority to obtain these papers since 1984, until now the agency maintained that such a step was too intrusive. In announcing this change, IRS commissioner Charles O. Rossotti said it is "critical to our ongoing effort to curb abusive tax avoidance transactions and to ensure compliance with the tax laws."
Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 15 years.
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